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April 2017

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System design advice for the Trump administration

As the Trump revolution gears up it is time to understand the solution to many issues facing government is as much system design as overall philosophy.  Obviously fewer regulations, less government, and more individual freedom are superior.  Real world results across the globe prove this beyond any doubt.

But within this framework, the design of these systems is something that needs renewed attention as it is fundamental to the results generated.  First let’s think about regulation and law.  The first step in analyzing a new or reviewing an established regulation is a clear definition of its goal.  Why does it exist and what do we want it to accomplish?  If this can’t be done then why do we have the regulation in the first place?  Nothing should move forward until this is clearly defined or the regulation is tossed in the dustbin.

But here is where regulation and law often goes awry.  It is the wrong path to attempt to determine exactly HOW to do this.  Rather effective regulation and law should set the boundaries between acceptable and unacceptable actions.  That’s it.  And perhaps counter-intuitively, acceptable actions should be undefined while unacceptable actions should be clearly defined.

As long as the participants stay within these boundaries they are free to do as they desire.  This imbibes the regulation and the area it attempts to regulate with life, flexibility and elegance; rather than a static unbending rule which doesn’t, and in fact can’t react to a changing world.

And speaking of life, organizations of all sorts behave much like a living organism.  Trump’s cabinet teams will soon be overseeing huge multi-layer organizations.  Some have called them the permanent bureaucracy since administrations come and go but they remain in place.

By their very nature these organizations are resistant to change and in many cases will be actively hostile to the actions taken by their new temporary leaders.  Unlike for-profit organizations which are ultimately restrained by the realities of the marketplace, the powerful non-profit organizations we call government are by their very nature not capable of self-correction.    

In addition they are far too large for a single person or even a committed team to transform them from the top-down simply by strength of character.  And of course there are unions and civil service rules which make them even more resistant to change.  Cutting funding is always an option but it can’t be the only tool since these permanent bureaucracies will almost assuredly make the most politically painful cuts first - to the people, not their organization - to ensure no more come their way.

Obviously the best option would be to never have these bureaucracies in the first place but for those that remain the only way to truly and continuously transform these permanent bureaucracies is to change their design.  Without changing their system design they will remain in place long after the Trump team has moved on.

Just like regulations, these organizational designs need to be re-built to imbibe them with life; the ability to change and react to changing circumstances.  Top-down hierarchical organizations, which occur nowhere in the natural world, have shown themselves to be both unwilling and unable to change via their own efforts.  This is especially true of the non-profit organizations we call government.

It is not possible to provide a single answer on how best to design these systems, that would be in direct contradiction to the functioning of these “living” systems but they must be built on a foundation which leverages two key facts.  First, the unbending law of statistics proves the many will always outperform the few and thus individual freedom designs versus top-down, “we-know-best” will be superior in providing positive results. 

Second, free individuals acting on local information will show far higher intelligence than a single individual(s) attempting to direct them; think of the intelligence in a school of fish or a bee hive versus the intelligence of an individual fish or bee.  One is orders of magnitude more intelligent and dynamic than the other.  The same is true with humans.  Effective, lasting, living and adaptive systems must be built on these two foundational facts.  Carpe diem President Trump.  Change the system design and change the world.

Insights on Racism from Ayn Rand

Ayn Rand generates strong emotions from all side but she certainly nails racism..

"Racism is the lowest, most crudely primitive form of collectivism. It is the notion of ascribing moral, social or political significance to a man's genetic lineage--the notion that a man's intellectual and characterological traits are produced and transmitted by his internal body chemistry. Which means, in practice, that a man is to be judged, not by his own character and actions, but by the characters and actions of a collective of ancestors

Racism claims that the content of a man's mind...is inherited; that a man's convictions, values and character are determined before he is born, by physical factors beyond his control. This is the caveman's version of the doctrine of innate ideas--or of inherited knowledge--which has been thoroughly refuted by philosophy and science. Racism is a doctrine of, by and for brutes. It is a barnyard or stock-farm version of collectivism, appropriate to a mentality that differentiates between various breeds of animals, but not between animals and men.

Like every form of determinism, racism invalidates the specific attribute which distinguishes man from all other living species: his rational faculty. Racism negates two aspects of man's life: reason and choice, or mind and morality, replacing them with chemical predestination."

And from her 1977 speech at Ford Hall Forum entitled, Global Balkanization:

There is no surer way to infect mankind with hatred--brute, blind, virulent hatred--than by splitting it into ethnic groups or tribes. If a man believes that his own character is determined at birth in some unknown, ineffable way, and that the characters of all strangers are determined in the same way--then no communication, no understanding, no persuasion is possible among them, only mutual fear, suspicion, and hatred,. Tribal or ethnic rule has existed, at some time...in every period of mankind's history. The record of hatred is always the same.

 

In summary, when in doubt always follow the truth... there are only individuals and they are not defined by the color of their skin or where their most recent ancestors are from.

 

A Plea to Betsy DeVos and President-elect Trump

Foreword – I don’t really like the method I am proposing in the following but I have over 30 years’ experience in re-organizing businesses and can state with absolute certainty that this country’s K-12 public school districts simply do not have the ability to transform in any meaningful manner.  It just isn’t possible. 

If we want to finally fix the failing K-12 public education system and help save every child whose heart beats today, we must take action.  Yes, God bless the school choice movement but their impact over the past 25 years as a percent of all K-12 students has been minuscule.  The solution is in changing the system and brute force and blackmail seems to be the only possible method to do so. 

jc

A Plea to President Trump

And so the Trump revolution begins.  If President Trump truly wants to make America great again he must address the sad state of K-12 public education.  It is both the cause and the solution to many of this country’s problems.  Positive national transformation is simply not possible without fixing K-12.

As an experienced manager you know one should always focus on why rather than who when addressing this or that failure.  Don’t blame the teachers.  This country is filled with hardworking, dedicated, and loving teachers, administrators, para-pros and volunteers.  They are not the problem.

Don’t blame the unions.  Yes, unions are always resistant to change but not being part of the solution does not mean they are therefore the source of the problem.  Rather the problem is K-12’s basic top-down system design.

On a per-pupil basis we spend more money on K-12 education than any other country on the planet.  Yet the fact remains most 8th graders are not proficient in either math or reading.  Only about 25% of incoming college freshmen are prepared for college, just 4% for blacks.  And few wake up the day before high school graduation and decide to attend college.  Most of these kids have been on a college-track for years and these are the results?!  What of those who weren’t on a college-track?

And the poorer one is, the worse it is.  The schools poor kids are forced to attend are a national and moral disgrace.  Their lives are being destroyed before they even have a chance.  And sadly far too many of these kids have black and brown skin.  If you don’t want opportunity to continue to be rationed by parent’s zip code, then the Trump administration must act quickly and boldly.

You must act quickly because you are only 7 years old once.  Most studies show if a child is not performing at grade level by 5th grade the odds are they never will.  Far too many school improvement plans act as though the goal is the school, not the students.  Plans taking 10-plus years to even begin to implement are a joke to every child whose heart beats today.  These supposed “improvements” will not impact a single one since they will have already moved far down that vast assembly line of K-12 education. 

You must act boldly because the present clearly isn’t working.  President Trump, in your business experiences you have witnessed the wonders of the marketplace.  How free people freely interacting with other free people can quickly and profoundly transform any area they touch.  Education is no different.

On average this country annually spends around $11,000 per pupil on K-12 public education.  In many inner-cities it is often more than double this.  Please push for introduction of a bill which forces any state that accepts federal education dollars to change the method(s) used to fund K-12. Rather than funding the education establishment, force the states to fund children instead.  The bill will require states accepting federal education dollars to give sole control to the parents to determine how and where these education dollars are spent, of course in some sort of state-regulated environment.  As icing on top, this won’t cost an extra dime.

This one simple change, which could be implemented right now, will unleash the wisdom of millions as the power of free people freely interacting with other free people transforms public education.  Every student will gain as will every teacher.

There are a couple models for this.  At the federal level a similar tactic was used in the 1984 highway bill which forced a national 21 year old drinking age; so what we are proposing is not new or unique and has been upheld by the Supreme Court.

At the state-level we have a model in the effective state-based regulation of beverage alcohol.  This country has one of the best regulated alcohol markets in the world while also being the most dynamic and innovative.  The same can be done with K-12 public education.  Let each state become a laboratory in democracy and watch the transformation happen before our eyes.  Leave it to the states to decide how to do it; the law will simply demand they must if they want to continue to receive federal education dollars.

The only way to fix a failing system is to change the system.  It is within your power to unleash the wisdom of millions by ending the failing, top-down, “we know best” system design of K-12.  Replace it with freedom.  Replace it with true opportunity.  Perhaps go for the whole enchilada and get rid of the entire Department of Education in the process.  It is a remnant of this failing system.

Will this be disruptive?  Of course.  But will it literally save this country and millions of young lives?  Without a doubt.  You have had the courage to do what the vast majority thought impossible; please do not avert your eyes to this on-going American tragedy.

And as a secondary benefit, can you imagine your inroads into all communities but especially the black and brown communities if you come with a $11,000 - $20,000 check to be used by parents to educate their children?  You will transform the political realities of the entire country while saving millions of young lives.  You will go down as one of the most transformational Presidents in the country’s history.

I beg you to bring freedom to K-12 public education.  The eyes of 75 million young Americans are upon you.  Please don’t let them down.

John Conlin is the founder and President of End the Education Plantation, www.EndtheEducationPlantation.org.   He started it because he’s seen first-hand the harm being caused by our nation’s schools and believes it’s time to do something about that.   

No Need For Kings

Just had this published in The American Thinker which you can find here or you can just keep reading…

I don’t like royalty.  Never did, never will.  You’ll never hear me referring to anyone as Prince-this or Queen-that.  I just don’t buy it.  Folks from other countries might choose to anoint others as their “betters” and to then bow down before them but not me.  I don’t care if it is governmental royalty, celebrity royalty or political royalty; you won’t see me on bended knee before them.

Perhaps it’s because I’m just some schmoe from fly-over country but the concept of royalty and me just don’t mix.  Royalty is based on an ancient, wrong-headed belief that “it’s in the blood”.  This is patently offensive to me as well as being quite provably false. 

This sick and twisted thinking is what drove and continues to drive the racial and ethnic stupidity that flows throughout this country. 

I am a proud American.  Perhaps I am naïve but I profoundly believe in the creed that all people are created equal.  Not as in the book Animal Farm where some are more equal than others (that’s royalty by another name) but that at our most basic, every single one of us has equal standing simply by our existence.  I’ll leave it to God to make judgements about our individual moral standing, for me we are all equal.  And please, this doesn’t mean we are all equal in our various abilities; that is a spurious argument at best.

One of the most profound moments in human history was the founding of this country on the premise that all people are created equal and that no royalty or ruling class was required; individual citizens could do just fine running their own country.  It was the people who had a government, not the other way around.

And a foundational belief in this equality is the absolute need for all citizens to be equal under the law.  Rich or poor, powerful or powerless; all are to be treated equally under the law.  If this is cast aside then so must the concept that all people are created equal.

If this is cast aside then we really do have royalty, whether called that or not.  If we allow this to be, it unravels the entire basis for this country.  The concept of equal justice under the law is not just important, it is fundamental.  Without it the words of our Constitution are simply a sad joke for those silly enough to believe them.  Is this where we have arrived where only saps like me are duped by this quaint notion?

How am I supposed to sit on a jury and decide my fellow citizen’s fate when I know that our political royalty are held to a different and almost always lower standard?  How can I demand my fellow citizens tell the truth under oath when no such demand is made of our royalty?  Why should I participate in any system whereby my fellow citizens are held to a higher standard than our political royalty?

I refuse.  Others in this country seem bent on anointing politicians as their betters and then rushing to bow down before them.  Screw that.  Although others might be quite ready to freely cast aside the fundamental notion of our individual equality and bow before their “betters”, I will not. 

John Conlin is President and founder of E.I.C. Enterprises, www.EICEnterprises.org, a 501(c)3 non-profit dedicated to spreading a fact-based paradigm here and around the world primarily through K-12 education.  He is an expert in organizational design and change. 

Our political Battle of Agincourt

As I sit here this morning my heart is heavy and I fear for my country, for my grandchildren, for my fellow citizens.  Immunity deals revealed, government-directed late Friday afternoon document dumps, media and government collusion to a degree few imagined; just more drips from what seems to be a never-ending flow of obvious corruption and criminality from the highest reaches of the federal government. 

To any honest observer this entire FBI – Justice Department “investigation” of Clinton’s use and destruction of a private email server is a joke, a charade, a kabuki dance for us deplorable rubes from fly-over country.  The fix has been in from the start. 

The concept of equal justice under the law lays tattered at our feet.  It seems there remains not a single soul in the FBI or Department of Justice whose personal honor has more worth than a paycheck.

When did we lose our freedom?  How did we lose our freedom?  And sadly why are so many quite willing to elevate people to royalty and to then eagerly bow before them?

Shakespeare coined many a phrase about scurvy politicians and cowards and they ring as true today as when they were written. 

But to my fellow deplorables and all who love freedom I offer another piece of Shakespearean wisdom. 

Let this be our cry.  Let this be our roar.  No matter how vile or whether we agree on other subjects, all who fight for freedom will be forever our band of brothers and sisters. 

This day is called the feast of Crispian:
He that outlives this day, and comes safe home,
Will stand a tip-toe when the day is named,
And rouse him at the name of Crispian.
He that shall live this day, and see old age,
Will yearly on the vigil feast his neighbours,
And say 'To-morrow is Saint Crispian:'
Then will he strip his sleeve and show his scars.
And say 'These wounds I had on Crispin's day.'
Old men forget: yet all shall be forgot,
But he'll remember with advantages
What feats he did that day: then shall our names.
Familiar in his mouth as household words
Harry the king, Bedford and Exeter,
Warwick and Talbot, Salisbury and Gloucester,
Be in their flowing cups freshly remember'd.
This story shall the good man teach his son;
And Crispin Crispian shall ne'er go by,
From this day to the ending of the world,
But we in it shall be remember'd;
We few, we happy few, we band of brothers;
For he to-day that sheds his blood with me
Shall be my brother; be he ne'er so vile,
This day shall gentle his condition:
And gentlemen in England now a-bed
Shall think themselves accursed they were not here,
And hold their manhoods cheap whiles any speaks
That fought with us upon Saint Crispin's day.

Let today be the beginning of our political Battle of Agincourt.  Let us never stop until we stand on the field of victory or lie in piles of smoldering corpses.  And this isn’t about Trump; he has a role to play and his election is important but our salvation lay in the hearts of millions of freedom loving Americans, hero’s all.  Do not look to others to lead; become the leader, grab the reins wherever you may be and make a stand.

Don’t listen to those who say we can’t win because we are outnumbered.  At the Battle of Agincourt the English fought in the mud; many naked and covered with feces from the rampant sickness.  They were outnumbered by at least 3 to 1.  And they lost 400 while killing at least 6,000 Frenchmen.

Never forget that “Cowards die many times before their deaths.  The valiant never taste of death but once.”

And for those who find Trump and us deplorables far too despicable to stand with and fight, I’ll again let Shakespeare provide the response:

“That he which hath no stomach to this fight,

   Let him depart; his passport shall be made,

   And crowns for convoy put into his purse;

   We would not die in that man's company

   That fears his fellowship to die with us.”

 We will let posterity determine the worth of their manhood’s.  Ours will stand long after theirs are but dust in the wind.

John Conlin is President and founder of E.I.C. Enterprises, www.EICEnterprises.org, a 501(c)3 non-profit dedicated to spreading a fact-based paradigm here and around the world primarily through K-12 education.  He is an expert in organizational design and change. 

The Organization as a Life Form

The following was recently published in The American Thinker, which you can find here or you can simply keep reading ;-)

 

Take a few individuals and put them together in an organization of almost any sort and an amazing thing happens.  The organization effectively becomes alive.  It creates a heartbeat of its very own and it, the organization, will fight to stay alive from that point forward. 

This is true of all types of organizations, both for- and non-profit.  Even though the organization is an artificial entity it will mimic a biologic life form.

It will first and foremost fight to stay alive.  It will seek to expand and grow.  It will seek out resources and will fight to retain these resources for its own uses.  It will attempt to take care of its own in all of its actions.

And it will do these things almost regardless of who the individual members are or how often they come and go.  Although directed by living people, the organization has a life of its own in many profound ways.   This isn’t a philosophical position, it is a fact. 

In a for-profit organization all of these organizational drives are tempered by the reality of the marketplace.  They must convince individuals to voluntarily part with their money for whatever goods and services are offered and to do so in a profitable manner.  Otherwise they will cease to exist.  These organizational heartbeats depend on success to survive.

But non-profit organizations aren’t bound by this reality.  And the biggest, most powerful, and most threatening non-profit organizations that exist are government.

The non-profits we call government don’t have to convince people to voluntarily part with their money.  They can force the issue.  They don’t have to provide quality goods and/or services and achieving these goals at a profit or even breakeven is not required.  Thus there are no feedback loops whereby reality can easily alter the path of these non-profit entities.  Effective feedback allows for gradual change and adaptation.  A lack of feedback sets the stage for catastrophic failures.

Government is often said to be inefficient.  It is not.  It is very efficient but its goal is not necessarily what we the people believe.  As an example look at the federal war on poverty.  Since this “war” was declared in 1964, the federal government has spent over $22 trillion on anti-poverty programs.  But only about 15% of the money allocated to fighting this “war” actually makes it to the poor.  85% is consumed by the entity.  The organization is quite effective at keeping resources for itself. 

Analyze almost any government program and you will see how efficient the entity is in retaining resources for itself.  100 plus governmental organizations involved in a single issue?  As they say in the software business, that’s not a bug, that’s a feature!

This is also the reason the non-profits we call government will never be satisfied with the money sent to them via taxes.  From the organization’s perspective (not necessarily the employees but the organization itself), it will always be underfunded.  Always. 

These non-profits generally grow by constantly adding people, either directly as employees or indirectly by making others dependent on their actions and favors.  These individuals will almost always vote in their own self-interest and thus the entity rewards and strengthens itself in a democracy by this constant expansion.

And amazingly, these activities have almost no relationship to the actual people who staff the organization. Some people might hasten the speed of expansion, others to slow it but the organizational entity behaves as it does by its very nature.  The process is much like a honey bee hive where the hive itself (an abstraction really) mimics intelligence and purpose, even though its individual bees have very little of either.

And these people can all be quite moral and “good public servants”, yet the organization will operate as it will.  Swarm intelligence and the self-organization it drives ensure this is true in almost all situations related to government.

We need to collectively understand and accept this very biologic nature of every entity created by this thing we call government.  Every single position, every single bureaucracy becomes another beating heart that will strive to continue and grow.

It is easy to blame one political party for the expansion of these non-profits but this growth occurs with either a Republican or Democrat at the helm.    

We see this most spectacularly in the transformation of the federal government.  Rather than the constitutionally construed federation of states with federal power being strictly limited, the non-profit we call the federal government has expanded to effectively subjugate the states and all citizens.

From an organizational perspective this was to be expected.  In fact it would be shocking if this were not the case.  The federal government has become much like the Ring of Power in Tolkien’s Lord of the Rings; one ring to rule them all.

For all citizens the ultimate question isn’t whether this evolution is good or bad but rather it is sustainable and can it work long-term?  The answer to this is clear.  Left unrestrained government is much like a kudzu plant.  Sooner or later it is destined to overgrow its environment until it collapses in a catastrophic failure; remember that lack of feedback.  Unless the life of these non-profits is constrained in some way, this process will always occur.

This is neither a conservative nor liberal issue; it is a basic reality of organizational behavior.  These organizations truly live in many profound ways and unless we citizens understand and accept this fact we will never be able to manage them.  We either learn to do so or they will most certainly be the destroyer of us all.

John Conlin is an expert in organizational design and change.  He is also President and founder of E.I.C. Enterprises, www.eicenterprises.org, a 501(c)3 non-profit dedicated to spreading the truth here and around the world, primarily through K-12 education.  

Honey Bees and Government

The following was published in The Federalist on 7/23/16.  The original is here or you can just keep reading ;-)

What Bees Can Teach Us About Why People Should Run Their Own Lives


Top-down, command-and-control systems will sooner or later create catastrophic failures. It’s not so with self-organizing systems.


July 23, 2016 By John Conlin

Individual honey bees aren’t very smart, yet honey bee hives, which may contain tens of thousands of individual bees, show remarkable intelligence. Scientists who study this type of swarm intelligence point out a key ingredient: no one is in charge. The hive functions just fine with no management, just countless interactions between individual bees with each following simple rules of thumb. A system like this is called self-organizing. Life itself is self-organizing.

That’s how swarm intelligence works: simple creatures following simple rules, each one acting on local information. No bee sees the big picture. No bee tells any other bee what to do. No fearless leader is required or desired. In fact, if a self-appointed “super-bee” were to attempt to take charge of this process, the entire hive would cease to function and all the bees would be doomed.


How Bees Find the Best Food

As an example, look at how the hive “knows” what is a better food source and reacts accordingly. Consider two foraging bees. Each bee returns to the hive and does an intricate dance that tells the surrounding bees the location of the food sources. In addition, the length and vigor of the dance transmits information regarding the volume of food available.
Just like the honey bee, we’ve unknowingly used swarm intelligence to develop knowledge and create wealth that allows us to collectively live like none before.

One bee has found a so-so food source, while the other has found a great food source. One bee dances for a while and the other dances far longer and thus impacts many more bees. Many more bees are thus directed to visit the better food source. Once they come back they too do a longer and more vigorous dance, again affecting many more bees than those few returning from the so-so food source.

Thus with absolutely no central, controlling intelligence—in fact, with little intelligence at all—the hive behaves very intelligently and directs the vast majority to the better food source, thus ensuring all are better off.

Although we humans like to think of ourselves as quite smart, we are much like the honey bee. Unlike the honey bee, we have complex language, the ability to use tools, and the ability to store and transmit information over generations. This lets each of us believe in our vast individual intelligence when in reality we each enjoy the fruits of millions and millions of lessons learned since the dawn of life itself.

Just like the honey bee, we’ve unknowingly used swarm intelligence to develop knowledge and create wealth that allows us to collectively live like none before. The beauty of swarm intelligence and self-organizing systems is that even for complex systems like human life and survival, behavior may be coordinated by relatively simple interactions. Here’s the key: in a self-organizing system there literally is no cause and effect. It just is.

Government Prevents the Honey Bee Principle

Yet also in the past hundred years we have seen across the globe a tremendous growth in powerful organizations that blatantly operate against the reality of self-organization and swarm intelligence. These organizations are government. Government typically attempts to do the opposite of those things that make for smart group behavior like decentralized control, response to local feedback, and simple rules of thumb. Self-organizing systems are an incredible strategy to deal with complexity. Government is not.

We must pull back from the brink and once again allow self-organizing systems to do their magic.

We have allowed these authoritative non-profit organizations (government) to become far too large and powerful. This violates almost every aspect we know about swarm intelligence. In addition, this in effect makes those who operate these non-profits into self-appointed “super-bees.”

They act as though they know better than the hive. Rather than allowing the wonder of swarm intelligence to freely operate, government “super-bees” instead direct vast swaths of our collective lives, to the detriment of all. As these organizations grow larger and larger, they are beginning to threaten the very continuation of life itself. Top-down, command-and-control systems will sooner or later create catastrophic failures. It’s not so with self-organizing systems.

One of the wonders of this country’s founding is its individual freedom-based political system, which limited government and allowed swarm intelligence and self-organization to flourish like never before.

The incredible wealth and individual freedom this country has produced in the past few hundred years versus the rest of the world proves this reality. We must pull back from the brink and once again allow self-organizing systems to do their magic. As government grows and grows, we are creating more and more super-bees. If we continue down our present path, those self-anointed super-bees will be the death of us all.


John Conlin is president and founder of E.I.C. Enterprises, a non-profit dedicated to spreading the truth here and around the world, primarily through K-12 education. He is a life-long entrepreneur and an expert in organizational design and change. His book, The Unified Theory, will be published in late fall by E.I.C. Publishing.

 

The Laggard - K-12 education

This country’s K-12 public education system is a mess.  The testing company ACT reports that 75% of incoming college freshmen are not prepared for college, 96% of African-Americans aren’t.  40 to 50% of all incoming college freshmen must take remedial classes; it’s 90% for the California Community College system.  The SATs report that reading scores are at a 40 year low.  Most U.S. 4th and 8th graders are not proficient in reading or math.  How can it be that an institution solely devoted to education can’t teach children of average intelligence to read or understand basic math in an 8 year time frame?! 

The US Chamber of Commerce reports 80 to 90 million adults today - about half the workforce - do not have the skills required to get or advance in jobs that pay a family-sustaining wage. 

How long will we sit back and allow this multi-generational carnage to continue?   How long will we accept this educational Armageddon?  How many more millions of children will see their futures ripped from their hands due in large part to the quality of the education they received?

Want to know a significant contributor to the racial problems in the country?  The incredibly lousy K-12 schools poor kids must attend.  And far too many of these poor kids have black or brown skin.  The damage flows from one generation to the next. 

Yet the country is filled with dedicated and hardworking teachers.  We spend more money per student than all but one country in the world yet our results aren’t even laggard, they are retrograde.  The problem isn’t the people or the funding, it’s the system and its design.

What is needed is a profound change.  What is needed is a paradigm shift.  Thomas Kuhn, in his transforming The Structure of Scientific Revolutions argues that science is not a steady, cumulative acquisition of knowledge.  Instead, science is a series of peaceful interludes punctuated by intellectually violent revolutions.  After such revolutions, “one conceptual world view is replaced by another.”

That is what the K-12 public education system needs, a simple paradigm shift from a static, top-down structure to a dynamic bottom-up structure.  The structure where a group of experts determines what is best for others has been shown to generate poor results the world over.  That’s undeniably the case with our K-12 system. The structure of free people freely interacting with other free people, i.e. a marketplace and its self-organizing nature, has transformed every area it has touched.

The evidence is overwhelming yet far too many intelligent people fight this paradigm shift.  Some of this is simply the human trait of fighting change.  But a more fundamental reason for the resistance is described by Kuhn.  Paradigms are the way we structure and order our worlds.  They are the way we describe and explain our beliefs.  Paradigms don’t exist in some solitary vacuum; they touch every area of our lives.

Kuhn accurately described the process of change as an intellectually violent revolution.  People, whether consciously or not, resist mountains of evidence since to do otherwise would open up their entire world view to this intellectual revolution.

But when one’s beliefs do not correspond to reality, one needs to change beliefs.  Reality has been shown to be rather resistant to the whims of individual belief.

The facts are clear; the K-12 public education system is failing this country’s children.  And the poorer one is, the worst it is.  How long do we allow this multi-generational carnage to continue?  The solution is right in front of us, freedom and choice.  Freedom and choice has transformed the world.  Freedom and choice has transformed every product and service throughout the world. 

For some will this require a paradigm shift?  Most certainly.  Will this new paradigm impact other areas of their lives?  Again, most certainly.  Will this new paradigm force individuals to reexamine many of their cherished beliefs?  Absolutely.  I’m sorry if that causes you distress, but the sooner one accepts the facts the better for all.

Or do we instead continue to chain children to a failing educational system?  A system whose failures rob far too many children of their life opportunities.  A system whose failures set the stage for multi-generational carnage, damaging young lives whose impact is felt for generations.  Will we consign millions of young Americans to a life of fewer opportunities simply because we find it uncomfortable to make the required paradigm shift?  This is the moral question of our day.  How you respond will determine the future of millions of young lives, and the very future of this country.

Time for the trash

This is an op-ed I had published as the lead in the Sunday Houston Chronicle in 2005...

Sadly we've only gone backwards since then.  None of the racial stupidity that surrounds us every day will ever change unless we change and accept the truth.

http://www.chron.com/opinion/outlook/article/Time-to-discard-the-outdated-idea-of-race-1934672.php

 

 

 

I am an extremist

I am an extremist. 

I believe we are a nation of laws, not of men.  We are a nation with a government, not a government with a nation.

I believe all people on the planet are born free with inalienable rights… rights which government can take away but not give.

I believe the Constitution means what the words say. 

I believe that if we want to change laws we should use the systems as built to do so, not simply ignore the law. 

I believe that judges have no role in making law and that they have no more wisdom or moral insights than the average citizen.

I believe that government is a necessary evil and we should strive to make it as small and efficient as it possible.  I believe a large and uncontrolled government is the biggest threat to individual liberty and freedom.

I believe that the laws of statistics (50 will beat 1 99.99999999999% of the time), the relatively recently discovered science of swarm intelligence and self-organizing systems, and real world results prove beyond a doubt that top-down, command-and-control systems will always ultimately fail.  They exist nowhere in the natural world.  I believe freedom is always the answer.

I believe that if we want uncontrolled immigration we should change the laws, not allow millions of illegal immigrants into this country… damaging the fabric of this country and creating a true second class citizen.

I believe that we as humans are bound by reality and that our wishes and desires have no influence on what is true or not.

I believe that government does not create wealth, only free individuals do.

I believe governments are simply large, non-profit organizations with no special powers or abilities.

I believe that the act of getting elected does not make one wise, intelligent, or ethical.

I believe that Frederick Hayek is correct… in all things someone ultimately has to decide and the best possible choice is to have free individuals decide, not some employee of government.

I believe much of economic thought is simply foolish ideas which have no basis in the real world.

I believe that individuals should be free to live their lives as they see fit as long as their actions hurt no one else.

I believe we are blessed beyond comprehension to live in the freest, most prosperous country the world has ever known.  And there are reasons for this!

I believe that none of these blessings are ours simply because we exist… we stand on the shoulders of millions before us and we can lose these blessings if we are not vigilant.

I hope and pray that I have the ability, strength and courage to live up to the ideals of the Founding Fathers.  To my fellow extremists I too pledge… “And for the support of this declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our lives, our fortunes and our sacred honor.”

I am an extremist and I shall not back down or retreat.

Niggers and Crackers

It’s 2016, a very New Year and I must admit, I simply don’t get it.  What does it mean?  It must mean something; something pretty darn important since it is almost constantly referenced.  “Blacks” do this… “Whites” do that.  On and on it goes. 

So what does being “black” or “white” actually mean?  What exactly are white and/or black people?  Please tell me.  Do they all have certain traits or behaviors?  Enlighten me.

It must be very important since we as a society seem to use this as the highest form of individual classification.  So inform this poor sap from flyover country, what does it mean?

To me, other than one being more socially acceptable than the other, I see little difference between classifying individuals as black than nigger, or white than cracker.  Next time you read an article that uses these words, substitute “the n-word” for black and see how it sounds, how it feels.

It you can’t clearly and concisely explain what these classifications actually mean as used in common parlance, perhaps we should just toss this failed “scientific” theory in the dustbin of history.

These concepts are only kept alive by our keeping them alive and the very first step in being racist it to classify individuals based on a handful of visible physical traits.  With this understanding of reality (and it is reality), pretty much everyone is a racist.  I’ve an idea!  Let’s just stop it.

Instead we seem to be going in the opposite and wrong direction; more and more non-scientific classifications of individuals into these various abstractions.  The Federal government even has “standards” for race and ethnicity.  And they are adding more and more each year.

It has been 185 years since William Lloyd Garrison published the first issue of his anti-slavery newspaper, the Liberator.  In it he stated…

 "I am aware that many object to the severity of my language; but is there not cause for severity? I will be as harsh as truth, and as uncompromising as justice. On this subject, I do not wish to think, or to speak, or write, with moderation. No! no! Tell a man whose house is on fire to give a moderate alarm; tell him to moderately rescue his wife from the hands of the ravisher; tell the mother to gradually extricate her babe from the fire into which it has fallen;-but urge me not to use moderation in a cause like the present. I am in earnest--I will not equivocate--I will not excuse--I will not retreat a single inch--AND I WILL BE HEARD”

And he was heard.   24 years and a bloody Civil War later the 13th amendment was ratified and slavery officially ended in the US.

It’s been 53 years since Martin Luther King Jr. gave his profound, “I Have a Dream Speech” in which he too spoke of the urgency of the moment; “No, no, we are not satisfied, and we will not be satisfied until "justice rolls down like waters, and righteousness like a mighty stream."”

And 53 years later how do we judge ourselves and answer his call to a dream?  “I have a dream that one day this nation will rise up and live out the true meaning of its creed: "We hold these truths to be self-evident, that all men are created equal."”

If that creed is factually true then let us finally drive a stake through the heart of the failed “scientific” theory of race.  There is no such thing as the white race.  There is no such thing as the black race.  There are only individuals and they are not defined by the color of their skin. 

The goal is not to be colorblind; that is impossible as I can clearly see differences in all people I meet.  The goal is to understand these visual differences have no meaning in and of themselves.  They are meaningless and classifying individuals in this manner is rooted in a failed scientific theory hundreds of years old.

Look around you; particle accelerators are discovering the most basic building blocks of matter.  Remote controlled robots are roaming the surface of a distant planet.  Medical miracles, only a few years removed from being a dream on a white board are saving lives every day.

Everywhere one looks astonishing advances in our understanding of basically everything yet we still cling to this foundational racist belief of our forefathers.  Yes this will require a paradigm shift and some will have problems with the lack of a categorization of “us” and “them”.  The real epiphany is that from a scientific viewpoint there is no “them” and thus all classifications attempting to create “them” are flawed from the beginning.

There is only one person on the entire planet that you can control, yourself.  So take the first step with me and together let’s end the obscenity of race.  The time has long come.

A Search For The Truth

When was the last time you were shocked or even offended by the truth?  When a discovery or accumulation of facts forced you, even demanded you re-think closely-held beliefs?  Forced you to discard an old idea and all it was built upon and replace it all with something new, even if you did not want to accept it?

For many, an examination of the wonders of the universe causes this shock.  Anyone who has investigated the incredible strangeness of the quantum world knows it well.

An honest search for the truth in all areas of one’s life is certain to demand this on an on-going basis.  It is a statistical certainty that no one’s belief system is an exact overlap of reality, and isn’t reality fundamentally the essence of the truth?

There are of course a few misguided souls who state there is no such thing as truth, everything is made-up.  But of course they throw these easy ideas away as soon as a loved one enters an operating room.  Then they will want the best science (truth) can provide.  And they never seem to purchase products or get on airplanes that are built ignoring the truth.  These fools can be ignored.

But the truth can not be ignored, not without great risk.  Yet in far too many areas of life we causally look at truth as something that is pliable to our desires… our wants… our beliefs.

Regardless of your political viewpoint, can anyone look at our politicians in action and state they are arguing and fighting in an aggressive search for the truth?  Yet government takes trillions of dollars from individuals – would not a reasonable person demand this money be spent building on the truth?  Many people treat economics as simply a pliable method to support their preconceived notions.  The social arena?  There is no truth, only beliefs and feelings that must be supported and promoted in whatever manner possible (and of course anyone who disagrees must have evil, wicked intent.)

Look around you.  It affects many, even scientists.  It is truly amazing how far too many scientists’ political views correspond almost exactly with their views on certain subjects, like global warming.  It is a statistical impossibility for this to occur in an honest search for the truth.

But we proceed down this path at our own peril.  We seem to think we can ignore that truth is based on facts.  Bertrand Russell captured this essence; “…minds do not create truth or falsehood.  They create beliefs, but when once the beliefs are created, the mind cannot make them true or false…  [w]hat makes a belief true is a fact, and this fact does not in any way involve the mind of the person who has the belief.”

A search for the truth.  Something that has taken us from single-celled organisms to the majestic creatures we are today.  In all but our most recent past, ignoring the truth was often met with a crushing response from the natural world.  Our collective prosperity now allows one to seemingly ignore truth with no obvious unpleasant repercussions.

So now, as we finally have arrived at a point where humans understand life, earth, and the cosmos to an astonishing degree, is not a time to ignore the truth.  The forces we deal with are powerful and unforgiving.  We have taken over our own evolution (whether we like it or not) and this process will only accelerate.  We have learned our activities can have a profound impact on our planet, for now our only home.  We have discovered so many things.  Now is not the time to let our prosperity lull us into foolishness.  Whether shocked, dismayed, or overjoyed; we must all continue in the quest for the truth, regardless of where it leads.

We are in crisis because we believe we can ignore reality

We are at a time of crisis.  Politically, economically, socially.  And it is not just the US; the world seems mired in crisis and the present political battles are simply a reflection of this reality. 

In his profound work, The Structure of Scientific Revolutions Thomas Kuhn noted that crisis is a necessary ingredient for a paradigm shift; that “Failure of existing rules is the prelude to a search for new ones.”

Perhaps it is time to listen to these failures and the crisis’s they generate and to accept a new paradigm that is more in sync with the actual results we witness every day.

But as Kuhn also noted, “A scientific theory is only declared invalid only if an alternative candidate is available to take its place.”  For this let me lend a hand.

I believe we are living one of the most profound paradigm shifts the human race has encountered since the scientific revolution.  The path we take will determine our futures as Americans, as a species, and will ultimately impact all life on the planet.  Whether we like it or not, we truly are the steward of all life on this planet.

This paradigm shift is from an opinion/belief paradigm to a factual paradigm.  The hard sciences made this leap centuries ago yet in other areas such as politics, economics and the soft sciences we act as though our very feelings shape and mold reality. 

We each are one of over 7 billion.  What you or I think is meaningless.  It has no effect whatsoever on what is true.  We are each part of an unbroken river of life that goes back almost 4 billion years.  We are each related, not in some touchy-feely philosophical manner, but truly physically related to all life on the planet. 

It is a mind-warping truth.  But our individual ease or difficulty in grasping a truth is not a reflection of the nature of the truth but rather ourselves.  The mental distance one has to travel from present beliefs to truth is irrelevant.

This is not a Republican or Democrat issue.  This is not even a conservative versus liberal issue; though conservatives/libertarians are correct many more times than they are wrong.  Those are beliefs from the present paradigm where one can choose what to believe and what to disbelieve.  The entire paradigm of conservative/libertarian versus liberal is based on this falsehood.

What is the fundamental basis for this fact-based paradigm?  The simple fact that we evolved on this planet; nothing more and nothing less.  And please, this fact says nothing about the existence of God.

And with the complete and utter acceptance of this truth, the entire conflict of visions as Thomas Sowell has so clearly written becomes a silly concept.  If we are part of this wonderful world then all of its laws apply to our lives.  Our visions are immaterial and attention granted them is a waste of time and draws us down false avenues.  There are an infinite number of things that aren’t true; we needn’t concern ourselves with them but rather collectively search for the very limited number of things that are.

Since the dawn of humans our political world has been a fight attempting to define the truth (and God).  Our efforts should rather be in attempting to discover the truth, not believing we have the power to somehow determine it.   

A paradigm shift like this, not a cumulative process built on extension of the old, but rather a complete reconstruction from new fundamentals is what we face today.

Kuhn quotes Herbert Butterfield, author of The Origins of Modern Science who describes it as “picking up the other end of the stick”.  A process that involves “handling the same bundle of data as before, but placing them in a new system of relations with one another by giving them a different framework.”

Embrace the fact that we evolved here.  Embrace that we are of this world and its rules apply to us.  Embrace that this fact leads us to accept an individual freedom and limited government reality.  This is not based on some political philosophy but rather that a simple examination of the facts clearly and unequivocally points one in this direction. 

This fact changes the entire debate.  Let us not waste time championing a liberal or conservative philosophy.  Rather let us collectively search for the truth.

We have no right to exist.  We have no right to live like we do as either Americans or humans.  We ignore reality at our own peril.  We either cast aside our childish belief-based paradigm and embrace the truth wherever it may lead, or we will most assuredly be the end of this incredible string of life.

Kuhn also noted once these paradigm shifts are made they “seem very much like tautologies, statements of situations that could not conceivably have been otherwise”.  Our acceptance of the fact of evolution and its meaning to our political, economic and social systems will someday be seen as one of these tautologies. 

Now we just have to bravely follow wherever these truths lead.  This conflict goes far beyond the present political campaign; the future of our species and all life on the planet hinges on the choice we make.

Brexit, the EU, and a school of fish

So Brexit won… God Bless those Brits!  They have hopefully stopped a slow-motion catastrophe that sooner or later was destined for catastrophic failure.

The problem with the EU AND the US government is they continue to use old and dis-proven top-down, command-and-control system design.  It’s not as though there isn’t some general agreement on desires and goals, it’s how best to achieve them (hint, freedom is always the best choice)

These governmental organizational designs are from over a hundred years ago.  The management thinking that accompanies them was discarded decades ago in this country.  Few employees in today’s world would like to be managed as they were when these structures were first introduced… so why do the elites think people will like (and accept) this from THEIR government… remember they work for us, not the other way around.

Empowering employees… driving decision making down to the lowest possible level… considering employees an asset, not an expense… flatter organizations with no wasted and unnecessary management layers (needless paper pushing doesn’t accomplish anything and distracts from those things that are important)… designing nimble organizations that can quickly adapt to changing conditions… these and many more organizational design improvements have transformed businesses across the globe.

Yet the EU (yes, we will tell you what type and shape of carrots you can purchase!) and the US government cling tightly to outdated and unworkable systems.

Think of a school of fish… there is no fish leader… there is no fish management… there are only individual fish who respond to what the fish around them do.  It is amazing but rather than leading to chaos, it leads to order and structure… but one of a very fluid nature.

And when a hungry barracuda cuts through the school, it scatters into multiple schools which quickly re-form back into the full school (minus a fish or two).

Think of how a school of fish would function under the EU’s (and the federal government’s) top-down, command-and-control design.  There would have to be “super” fish of varying management power telling the others what to do, when to do it, and how to do it.  It is difficult to even imagine how a school like this would even function.  It would be incredibly slow in responding to almost anything. 

Information would have to flow up from the bottom, going through multiple super-fish layers until it reached the top-fish.  If fish communicate anything like humans, the information the top-fish received would be far different than what started at bottom.  Then the top-fish would make a decision and the information would flow back down through all those layers of super-fish until it reached the individual fish in the school.

It could never function in the real world.  And if by some miracle it did, what would happen when that same barracuda attacked the school?  It would completely fall apart.  There would be no way for the information to flow up and then back down in time to address the attack.    

Rather than the elegance of the natural school… reacting, bending, flowing apart and then back together again… the top-down school would splinter and cease to function.

Now a school of fish’s time frame is much shorter than the EU and federal governments, but the same forces are at work.  And much like gravity and other natural forces, these things are true whether anyone likes it or not.

The concept of the EU may make sense at various levels but the system design(s) are simply inadequate in dealing with reality.  Unfortunately those who drive the EU are also the ones who see themselves as the super-fish and thus they are hesitant to change the design and let the school be the school.  People seldom willingly give up power over others… unfortunate but true.

It the Brexit vote forces them to reconsider their top-down, command-and-control thinking, the Brits will have done the world a favor.  Now if only the American public would have the same epiphany, we might even be able to save this great country of ours (sorry Bernie & Hillary but your solutions ARE the problem).

Please share if you agree.

jc

Me First!

On a dark, crystal clear Colorado night, stars blazing overhead, I strolled along the Highline Canal with my dog –a 6-month old puppy named Buda.  In the distance, unbeknownst to me, Buda spotted a small group of people and raced to challenge the “intruders.”  What a magnificent act, I thought.  His “Me first” charge without regarding his own safety.  To freely place himself in harms way; to risk violence and even death to protect me.

With the current world affairs I find myself contemplating that act quite often.  I think of the bravery of the men and women in our armed services.  Me first!  Before you can attack my family, friends, or my country…me first!  I think of the Special Forces and Marines especially, for they are the first of their comrades to volunteer to be at the forefront of all the mayhem. Me first!  I can’t find the words to express the gratitude I feel for every last one of them.  Me first!

Me?  I’m an overweight, balding 59-year old.  In 1975 I graduated high school.  I watched the failure of our politicians during the Vietnam conflict and the carnage associated with it.  Even though the chance of me going off to war at that point in time was remote, I watched the draft lotteries with anticipation to see where I would have fallen IF I were a few years older and my number had come up.  Looking back, those years seem like a whole other world.

I’ve always been somewhat patriotic but as I’ve matured I find that in the past I didn’t truly realize the grandeur of these patriots.  Me First!  Not that all patriots are saints; they’re not.  Not that all patriots are honest, trustworthy, and brave; they’re not.  And it’s not that all patriots are happy to be placed in those situations which require them to act accordingly; they’re not.  But they are the ones who ran forward for reasons unexplained, and said me first!

I’ve committed myself from this day forward –whether in War of Peace- to bow deeply before these magnificent individuals, discard any manly pretensions, and cry out when I think of their sacrifices.  The sacrifices made in the past, today, and the sacrifices yet to come for this great country.  Me first!  It will not be forgotten

My Dad's Left Hand - A Father's Day Salute

My dad’s left hand is messed up.  It didn’t develop properly in the womb.  It’s an oval-shaped thing with small, dangly, non-working nubs. 

I have never considered him handicapped.  I’d guess the same is true of most kids whose parents were in some manner not physically “right.”

He was a great athlete in his youth.  He’s also a pretty dang good carpenter, plumber, electrician, mechanic, horseman, farrier, farmer, rancher, hunter and fisher.  And yes, he can do all of those.  Better than I am on all counts, even with my working left hand. 

My dad’s birth defect - yes that’s what it is, it isn’t supposed to be like that - has absolutely no bearing on his moral standing as a human.  He is not somehow morally “less” simply because a hand didn’t develop as designed.  His hand is both natural - it occurred, didn’t it? - and unnatural - that’s not how a hand is supposed to be - at the same time.

But in no way is he morally inferior because of this reality. He is not defined by his left hand.  It is an aspect of him, but only one of hundreds, and not a very important one to boot.  I suppose people could use his left hand as the sole means to define him but that would be rather silly.

Each of us is like a multifaceted cut diamond with hundreds and hundreds of aspects.  As free individuals each of us can choose which aspects of a person are of most importance and judge and discriminate for or against them accordingly.  Not everyone is my cup-of-tea and I am certain I’m not for many others. 

I think of this when I see my college buddy’s 20-something son who has developed a serious brain malfunction.  He visits his personal hell on a regular occurrence.  It is heartbreaking to watch.  But he simply has a brain issue.  Just like my dad’s left hand, his brain simply didn’t develop exactly as designed.  It is again, both natural and unnatural at the same time but in no way is he morally inferior; he is not “less” in any way.

I think of this when I see a friend’s autistic child.  He is not morally defective; he simply got dealt a crappy hand in the development of his brain.  Natural and unnatural at the same time.

And I’ve been thinking about this as I read about the growing movement to more fully accept those whose sexual traits exist outside the norm.  Although many in these movements don’t want to accept it, these are natural and unnatural at the same time.  But not morally inferior.  Not morally defective.  Just different on one aspect of the hundreds that make us who we are.

Each of us has unnatural aspects to ourselves.  Some are small and some are large.  Some are hidden and some stand out.  But each of us is so much more than these quite natural differences.  Each individual is a cornucopia of traits.  Some we might like and some we might not.  We can choose our friends and shun others based on a single trait or the collection of the whole. 

None of us are defined by a single facet of who we are. So, why make judgments that don’t encompass the whole person?

My dad is not defined by his left hand.  We don’t need to celebrate his left hand, simply accept it for what it is; a very small and not very important part of a much larger mosaic. And I am dang lucky to have him as my dad.

If you agree... please share ;-)

 

Can you say “moo”?

Ahhh, the quite of the pasture… the chirp of the birds… the cute bunnies scurrying here and there… and the contented sound of the cows as they are milked in the barn… moo.

Moo indeed.  After recently reading in Harry about upcoming price hikes, led by ABI as usual, I had a sudden mental image of the US beer market (consumer and wholesaler) being milked and milked and milked… whether happily or not is another question ;-)

In a prior post, which you can find here I discuss the business concept of a cash cow.  And what does one do with a cash cow?  You milk it.  And my oh my, ABI with MillerCoors (and others) willingly following are yanking on those teats like no one’s business!  Even those craft folks are enjoying a tug here and there. 

Even you wholesalers are getting in on some nice milk… what are your gross profit percent’s?  What are you putting to the bottom-line?  There’s a little moo for everyone ;-)

But what of the poor cow?  Is there any concern for ol’ Bessie?  Or is she simply milked and milked and milked until there is nothing left?  And what happens to ol’ Bessie when she can’t produce any more milk?  Why she is sent to the Slaughterhouse.  Don’t forget, that place has earned that name.

I know the craft beer folks are laughing all the way to the bank – from both a profit and market share perspective.  Think how the entire US beer business would be different if ABI had pursued a balanced market share strategy versus grabbing the ol’ milking stool and sitting down for some hard work.  The entire US beer market would look much different if the Third were still running the show.

Think of paths not taken… this milking strategy has strengthened the craft brewer’s incredible growth… wine and spirits love it too… and with the now un-stoppable power of the prettiest girl at the dance, in affect it has set in motion the complete destruction of the 3 tier system (I believe that is already baked in the cake).  A butterfly beats its wings in the Amazon and… ;-)

To the quickly shrinking pool of beer wholesalers out there (and all of us unfortunate consumers who have little say in this)… can you say moo? ;-)  At least you wholesalers are being well-fed – for now…

We poor consumers are simply getting milked without even a kiss or an extra bale of hay… and many are following the value proposition that craft is a better deal… Moo.  Moo indeed.

A good idea for the 4th

The following is copied from the 07/03/2015 Wall Street Journal.  Why doesn't the industry unite around this rather than fighting for goodies from the leviathan's trough?  "I deserve lower taxes!"  "NO!  I deserve lower taxes, you're too big"  and on and on it goes... 

A Too Dry Fourth of July

If you’re old enough to serve, you’re old enough to be served. Let’s change the drinking age.

By
William McAloon
July 2, 2015 7:08 p.m. ET
Photo: Getty Images

Sure we’re safer—but at what expense? How much liberty must we sacrifice to remain safe?

No, I’m not referring to the Patriot Act. I’m talking about the drinking-age laws. In particular the age restriction for young military personnel. The arrival of Independence Day this weekend strikes me as a good time to think about freeing America’s men and women in uniform from drinking laws that treat them like children.

The thought came to me a few weeks ago while watching a New York Yankees game on TV when a comforting image popped up: a group of young sailors and Marines enjoying the game. As the camera zoomed in, I could see these seamen and lance corporals, many with stacks of ribbons from sea service and combat, smiling as they cheered on the Yankees, their laps filled with hot dogs and other bounty from the concession stand. Not a beer in sight.

Then it dawned on me: Those young military men and women must have been under 21, not legally old enough to buy a beer at a ball game. It’s going to be the same this Fourth of July, from sea to shining sea—or at least from Oakland, where the Athletics are playing the Seattle Mariners, to New York, where the Yankees face the Tampa Bay Rays. Independence Day weekend. How un-American is that!

As a former active duty Marine officer, I served with men and women who did multiple deployments to Afghanistan and Iraq before being legally permitted to drink their first beer. I know that those who are under 21 aren’t necessarily deprived of the occasional cold one or cocktail, thanks to patriotic bartenders. Millions of these young service members’ underage civilian peers also have access to alcohol.

So why does America have a law that is widely ignored? Because we’re “safer.”

Yes, pegging the drinking age at 18 would likely result in more drunken-driving tragedies, but a certain amount of risk is involved in every attempt to impose legal limits on behavior. Lives would also be saved by raising the drinking age to 25 or 30, but we certainly don’t do that.

Young adults, either college students or those starting out in jobs, are learning to live on their own and make decisions for themselves. That is precisely the wrong time for them to receive a message that the law doesn’t matter. Laws should be reasonable, limited and enforceable—and in the case of the drinking laws, they’re none of the above.

There are plenty of debates in the U.S. about balancing rights and security. Lawmakers and the intelligence community are warned that domestic spying might make us safer, but it’s too big an intrusion on privacy. Why not have a conversation about the drinking age and the loss of personal freedom?

Three decades ago, states set their own legal drinking ages, but that was effectively ended by the National Minimum Drinking Age Act of 1984, which mandated a 10% cut in federal highway funds for states that didn’t ban anyone under 21 from buying or publicly possessing alcohol. That puts the U.S. among a handful of developed nations, including Japan and South Korea, with a minimum drinking age over 18.

Maybe the rest of the world knows something we don’t: Better to let young adults learn to drink responsibly than to make consuming alcohol illicit and thus more alluring. College administrators regularly wrestle with the evidence that binge drinking and dangerous activity increases when booze moves from the bar to private settings.

America tells its 18-year-olds that they are adults. They can vote. And they can join the military. We send thousands of these men and women into combat and tell them that they are mature enough to die for their country but not mature enough to drink. Here’s a suggestion for people who complain that the current generation of young people is too babied: Start treating them like adults.

Candidates vying for the 2016 presidential nomination covet the youth vote. They could do worse than proposing to go back to setting the drinking age at 18, ending this era when disrespect for the law generally is increased by a drinking-age law that is widely ignored.

Failing that, maybe Washington would go for this compromise, one that would encourage enlistment in America’s all-volunteer military: Sign up for the Army, Navy, Air Force or Marines at age 18 and you can drink legally with your brothers and sisters in arms. Happy Independence Day.

Mr. McAloon is a former captain in the U.S. Marine Corps and an Operation Enduring Freedom veteran.

 

 

 

More fussing about beer

I think ABI must have hit a chord with that Super Bowl ad “Brewed the Hard Way”.  See the previous post if you haven’t already read my copious wisdom.

Recent headlines…

  • “How craft beer is fighting back against Budweiser's belligerent Super Bowl ad”
  • “Beer fans lash out after craft brew Super Bowl ad”
  • “Reaction to Bud's craft-beer-slamming Super Bowl ad includes this made-in-Oregon spoof”
  • “Shots fired, shots returned! Craft beer hits back at Budweiser's attempted takedown”
  • “A-B Wins the Super Bowl, Again.  Airs Controversial Anti-Craft Ad”… thanks Harry ;-)
  • “Analyzing Budweiser's Hypocritical, Anti-Craft Beer Super Bowl Ad”
  • “Craft beer enthusiasts still foaming over Budweiser's Super Bowl ad”
  • “The Frothy Backlash to Budweiser Ad Mocking Craft Beer”
  • “Budweiser’s Awful Super Bowl Ad Is a Perfect Illustration of Why Young People Don’t Drink It”
  • “How Budweiser Upset Every Craft Beer Drinker and Brewer In America”

Belligerent?  Fans lash out?  Craft hits back?  Controversial?  Anti-craft?  Awful?  The vapors certainly seem to be making a comeback.  And no, I’m not talking about the song Turning Japanese ;-)

The brand Budweiser has been mentioned more in the last 5 days than it has in the last 5 years... well that might be an exaggeration but you get my point.  And that is a failure?  Who knows, the backlash against the backlash might just drive more people to give it a swig.

And people who are never going to drink the product anyhow are aflame in the twitter-verse.  This is the intersection of many things; social media, marketing, competition, cowardice and of course a hearty serving of idiots – which is what you will find in abundance in the twitter-verse. 

First, many craft brewers saw this as a chance to piggy-back on ABI’s ad.  This is a common response from small competitors in all types of markets… and it’s not a bad strategy.  The craft brewers who responded in some way to this ad all got A TON of free PR.  Their names were also mentioned more in the last few days than in all the years prior. 

MillerCoors had to respond so they too would be included in MANY of these stories… presenting themselves as kind of like a buddy to craft brewers.  Interesting strategy… I think I’ve heard of that from some business genius.

And of course the media plays it up because they need to feed the beast… the constant need for material to fill the space between the ads.  And “controversy” helps drive those click-rates… as do over-the-top headlines.  “Ronald Reagan dies!  His hair”

A side note about PR… back when I was running my tech-company, we would get great PR.  We were written about on a very regular basis.  And the next day the phone would ring off the hook!  Unfortunately the calls were all from real estate folks (you’ll be needing more space!), copy machine sales reps, telephone sales reps, etc. (I always tipped my hat to the sales folks, good prospecting on their part… although I didn’t appreciate their calls)  I don’t think we once got a clear lead from any PR we got.  Now we weren’t selling a consumer product but PR ain’t all it’s cracked up to be ;-)

Back to twitter-land… This reality also drives the “need” for rapid response, so that one can piggy-back ASAP.  And it drives the imperative that everyone and his dog jump in to get a piece of the action.  This drives a feeding-frenzy that generally WAY over-states the true impact/feelings of these responses.  In twitter-land, an hour or two (forget days) is a LONG time.   And it is just about as deep.

Just the other day The Wall Street Journal ran a piece on talk radio.  The listeners are still there in droves, but advertising rates have fallen as many national advertisers have fled from these stations… why?  Fear of being twitter-bombed by a small group of motivated activists.  It started in 2012 when liberal activists organized social media campaigns to go against advertisers on conservative talk shows.  Rush Limbaugh and his famous “slut” comment was one of the first of these campaigns.

But corporate America is not the land of the courageous.  Few people ever got fired for not doing something or not making a decision.  Now doing something?  That’s where the risk is.  So the easiest path is to roll over and attempt to offend no one… which is of course impossible. 

Thus my amazement (and admiration) that ABI actually did the piece.  I know a hell of a lot of beer distributors, ABI and MillerCoors, were cheering on that ad.  I know ‘cause they told me so.

I think more companies (and people) need to simply stand up to this feigned outrage by a handful of people… and never forget those 500 million tweets per day.  Get over it and go live your life however you desire.  And leave me the-f alone.

Getting the vapors and hiding behind our petticoats ain’t the way to go… especially for a mainstream BEER brand.  If beer gets as pussy-fied as a lot of the rest of the world, we are all lost ;-)  And trust me, the folks who drink Budweiser, Coors, etc. aren’t pussy-fied… nor do I expect them to ever be so. 

If I want to advertise to them, I’d be wise to understand this reality.  And if some blouse-wearing poodle walker - thank you Grounds Keeper Willie ;-) gets a’ fluttered, so be it.  They aren’t going to be purchasing the product anyhow so why exactly do we care what they think?! 

And guess what… the vast majority of craft beer drinkers also aren’t some pussy-fied, blouse-wearing poodle walkers so the craft industry walks on thin ice when they present themselves as such, vapors and all. 

Craft brewer aren’t doing themselves any favors (or proving their intellectual honesty) when they act as crybabies over this Fussing ad, yet they see nothing wrong with things like “Craft for Crap” where you can trade in a bottle of crap (yeah, Bud, etc.) for a craft beer.  Perhaps the big dog brewers should start talking about real crap like WAY over-aged beer… brewers who are afraid to even put code-dates on their beer… bottling line/manufacturing cleanliness, and other little things ;-) 

Or we could say hooray for all beer.  Some you might enjoy… some not.  So?

The vast majority of Americans aren’t pussy-fied, blouse-wearing poodle walkers; we do them a disservice acting as though they are and they can’t take a little good-natured ribbing… going in both directions. 

I’ve done many a re-organization where loud voices and cursing were the norm in the planning process.  Vigorous debate leads to better solutions.  And after the yelling was over, we go out and drink a few beers… and yes, even enjoy each other’s company.

Back to the ad… in summary I think both played to their audiences and each got a healthy, hooray for our side!  Super… now get back to work.

Was the ad for Budweiser over the top?

Inquiring minds want to know… what did I think about the ABI Super Bowl ad “Brewed the Hard Way”?

My Super Bowl party with all my friends was going full steam ahead… composed of my dog and I watching the game with more than a few cold beers.  And then this insulting, tone-deaf, Budweiser ad.  Why I almost got the vapors!  If not for my faithful dog helping to resuscitate me with another cold beer, I might not have made it. 

(In all honesty, my dog is the biggest beer thief on the planet; turn your back for a minute and he goes from sound asleep pooch to evil beer-lapping fiend – if I had dropped from the vapors he would have first consumed my beer and then rifled through my pockets looking for the car keys.  He does leave my gin-and-tonics alone though, but not my dill pickles)

Anyhoo, I thought the ad was freaking great.  I’m surprised they ran it but I tip my hat to them for doing so.  That brand name is one of the most wide known brands in the entire world… you’ve got to leverage what you’ve got, not hide from it.  And here’s a shocker… whether it is your cup-of-tea or not, it’s a damn good, well made beer.

And tweaking – no, not twerking ;-) the craft snobs will most likely go down pretty well with anyone who might be a possible Budweiser consumer.  This country has a long and glorious history of enjoying snobs of all sorts getting taken down a peg or two.

And for the vast majority of beer consumers, they don’t know or care about ABI’s purchase of craft brewers so this “conflict” is meaningless to them.  Good god, it’s a freaking ad! 

To all the craft folks who’ve got their panties in a bundle, grow up.  Has a sense of humor been abandoned by all of you?  Many companies, Proctor and Gamble was the best at it, set one division/product line against the other all the time.    

They’d have 5 people hawking different laundry detergents to the same chain and they were told to fight for THEIR brand… and they were measured by how THEIR brand did.  If you could take space from another P&G brand for yours… you did it.  If they couldn’t fight for their brand, screw them.  This drove everyone to excellence… or the door ;-)

Brand “conflicts” are the norm when a company has similar products in various categories.  And cheering one on can have the perceived effect to some sensitive souls of “dissing” another.  So?

Just because ABI is playing in the craft world, they should be ashamed of brands like Bud and Bud Light?!  “yeah, we came to our senses… that Bud stuff is watered down crap and we’re sorry we even produced it.”  And those millions of drinkers who make them the 1st and 3rd most popular brands in the country?  “Only” about 1 out of 4 beers consumed in this country are one of those two.  Guess you folks are dumb asses.  Please.   

Was it a good ad?  I don’t know since the only accurate measure of ad effectiveness is people parting with their money and purchasing your product.  So we’ll have to wait and see. 

In addition one should be careful from confusing a well-liked ad to a good/effective ad.  We get all these spur-of-the-moment measurements of how much someone likes or dislikes an ad.  Just like focus-groups, these have almost no meaning.  Historically one of the most disliked ads in TV history, “ring around the collar” was also one of the most effective.  People supposedly found the ads offensive but they sure purchased Wisk to solve this problem. 

Will this ad sour craft brewers from considering selling to ABI?  Only the idiots. 

And of course in today’s connected, social media world this all takes on a much bigger image than is truly there.  Do not forget this point.  The illusion is much bigger than the reality.  Everyone and his dog has an opinion and they toss them about on every conceivable subject.  Ponder these stats…

Every second, on average, around 6,000 tweets are tweeted on Twitter, which corresponds to over 350,000 tweets sent per minute, 500 million tweets per day and around 200 billion tweets per year.

Anyone who spends too much time chasing this mirage will quickly find nothing really is at the end-of-the-rainbow.  And no matter what one does, there will be someone who isn’t happy with it and will tell the universe their opinion – like anyone is listening.  Why even little ol’ Johnny sometimes upsets a person or two ;-)

The responses I’ve read in the various trade publications seems like the beer equivalent of high school cliques on steroids.  And on second thought, that is perhaps too generous, perhaps middle school is more accurate.  I guess the vapors affect more than just me ;-)

Not to let a chance go by to kick your competitor in the groin, MC jumps into the collective outcry that beer REALLY is worth fussing over!   I can guarantee you that is the case where my dog is involved.  So MillerCoor’s tweet carries some big impact out of the 500 million sent on the same day?  Sure.  

Much ado about nothing.  A good ad from ABI for a good product.  Here’s a shocking idea… perhaps Bud can be a good beer as can Goose Island (or whatever).  They are not mutually exclusive.  It is not a zero sum game.

And in the rough-and-tumble of competition, you might consider my cheering for my team an insult to yours… get over it.

And for those who decry the ad since we should be all about “brand beer”?  That ship has sailed.  The entire regulatory structure of the 3-tier system is under attack, mostly by those inside the fort, and you worry about protecting “brand beer”?!   What planet are you on?

I see a ton of people, almost all of them craft, who clearly have no intention of supporting “brand beer”.  Where was the outcry from “the industry” when they disparage pretty much every product that isn’t theirs? 

This will be for an upcoming post but the unity of “brand beer” is long gone, the 3-tier as has operated for the last 80 years will soon be a thing of the past… and those who aren’t fighting solely for themselves will find that to be a foolish choice. 

 

Craft brewers and food trucks

What can craft brewers and food trucks teach us about economics, government policy and freedom?

When the dot.com explosion hit, fueled by the rapid growth of the Internet, few would have thought it would be a boon for the low-tech world of delivery.  Yet FedEx, UPS, and even the good ol’ post office saw incredible delivery growth as all those on-line purchases had to be delivered by somebody.

Did anyone plan this?  Nope.  It just happened.  No government-driven genius, just the marketplace responding to a new world of on-line purchasing.

Much the same has/is happening with the explosion of craft brewers and more specifically their tap rooms - places we used to call bars ;-)

These tap rooms are incredibly popular.  In fact if I were to start a craft brewer today, this is where I’d spend my efforts, not trying to be the next New Belgium.  $6 per beer that has no transportation costs… few if any packaging costs… no sharing of the margin with those greedy distributors or retailers… just one heck of a lot of profit for the folks brewing the stuff.  That’s where I’d stake my claim.  As long as I can fill the place with people, I’m going to make a lot of money.

But in many places around the country these tap rooms are legally required to be just that, places where the craft brewer can sell their product.  Nothing more.  No kitchens providing food… just tap rooms providing beer.

And this is where the wonders of the marketplace again show their abilities.  How did the marketplace … for those who need a definition, the marketplace or capitalism are better described as…

Free people freely interacting with other free people.

So how did the marketplace respond?  With the genius of food trucks.  Although the tap rooms might not have a kitchen, they probably have a food truck parked outside that can provide some yumminess whenever your heart desires.  This wasn’t anyone’s grand plan… no government expert required… just the marketplace responding to a need/opportunity.  A true win-win-win for all involved – the craft brewer, the food truck operator, and the customer.

The craft brewer doesn’t have the expense of running a kitchen (something which they probably have little, if any expertise in) and better yet, they in effect become 7 restaurants in one (in many cases even more).  The tap room has this type of food on Monday, another on Tuesday, another on Wednesday, etc.  Some are actually multiple restaurants in the same day… afternoon we’re this type of restaurant, in the evening we’re this type. 

Most craft brewer’s web sites “sell” the various food trucks that will be at their place.  They can be a strong marketing draw.  It isn’t just the beer that is driving folks to some of these places.  In many cases the lack of a kitchen has actually been turned into a strong positive!

Sure the craft brewer doesn’t get any of these food sale dollars, but they don’t have the headaches and expenses of providing the eating opportunity.

This in turn has driven the food truck industry to new heights.  The quality and variety of food being offered has increased by orders of magnitude.  These ain’t no roach coaches of old.

The food truck operators and the craft brewers act as symbiotic organisms… one’s success/improvement flows to the other and vice versa.  Better food brings more people… the food truck wins and so does the craft brewer.

Better beer/marketing of the tap room brings more people… the craft brewer wins and so does the food truck.

Craft brewers fight to get the best food trucks… the food trucks win and the craft brewer wins.

Poor beer or marketing and/or lousy food hurts both the brewer and the food truck… thus it is quickly punished by fewer people for both.  That symbiotic relationship functions in both directions ;-)

And throughout this beautiful dance, the customer wins every single time.  Win-win-win.

Just a thought this holiday season and one to keep in mind as you fine-tune your political philosophy and think about who to vote for.

And as a last little X-mas present, the next time you hear someone spouting off about the “evils” of capitalism or the marketplace, remember those are just words.  What they are describing is a process of free people freely interacting with other free people, bound by a general set of laws and regulations.  Who could be against that?  ;-)

Why am I on my soap-box?  As the patriot and brewer Sam Adams noted,

It does not take a majority to prevail... but rather an irate, tireless minority, keen on setting brushfires of freedom in the minds of men

This is needed today, perhaps more than at any time in this country’s history.  Please, grab some matches and go set some brushfires of freedom yourself!

From this black-hearted, mercenary… Happy holidays to all!  Now get back to work.

Visions of sugar plums...

There are numbers that just seem to get our attention.  And one billion is one of those numbers… especially if it is one billion dollars.  That’s the purported amount the Reyes’s will pay to acquire Gold Coast distributing down in Florida.

First a tip of the hat to the brothers.  They have been executing an opportunity-driven strategy for a couple decades now and the results are impressive.  As I have noted time and time again, all success begins with good strategy.  They actually walk the walk… far too many wholesalers over the years liked to talk the talk but when it came down to getting a deal done, they fell short. 

Other than a hefty checking account, the Reyes’s don’t bring any magic to the table… they know what they are trying to do, are staffed with high-quality professionals, and simply go out there and get deals done.  Win – win works.

This magic billion dollar payout now has a lot of folks in the industry AGAIN thinking… is now the time to get out?  Heck if I know… what is your STRATEGY?  What do you want to accomplish?  Is this goal obtainable?  With acceptable risk?  And what is Plan B (and C and D)?  Can you live with all of the various possible futures?

Spur of the moment decisions heavily influenced by what the brothers paid for a rather unique distributor that fits into their unique Florida strategy is not the way to do this.  Thinking and planning is the way to do it… whether you plan to run for the exits or batten the hatches in a plan to be around forever.

For many of you the first step is a market valuation.  How can you decide whether to stay or go if you don’t know what your asset is worth?  This could be combined with a few day strategic planning session where we analyze your business from the top-down, including detailed analysis of all M&A possibilities. 

Included in this must be a discussion of the threats and opportunities you and your organization face.  I personally don’t care what decision you make; I just want you to make it with your eyes wide open and with full understanding of what may or may not come your way.

As I’ve noted in past posts… a “good” decision or a “bad” decision are generally determined by what future happens to come down the pike.  The exact same decision might be great under one future, and terrible under another.  So do what you can do… think, analyze, measure, talk, plan, execute… adjust as data/results come back.  Just keep driving towards that strategic goal.

Steve Cook and I do the best valuations and planning in this industry – just saying ;-)  Actually Cook does most of the real work.  I’m more of a soap-box guy ;-)

So if that $1,000,000,000 has got you thinking… stop dreaming of sugar plums and give us a call.  I’m all for sugar plums, let’s just make certain you’ve completely thought the thing through to better ensure you end up actually eating those sugar plums rather than just dreaming about them.

 

Should beer/alcohol/beverage distributors enter the legal marijuana world?

First the news from the elections… Oregon legalized.  Alaska legalized.  DC legalized.  4 states plus DC now have full legal adult marijuana.  Guam approved medical marijuana.  Various cities around the country voted to decriminalize.  In 2016 we will have 10+ states looking to legalize.  Whether one agrees or not, this is a tidal wave that is a’coming.

Now my post…

It seems many are kind of confused about this opportunity.  After my last email I’ve been contacted by quite a few folks who have some interest in exploring the new wild and wooly world of legal marijuana.  I personally am tired of providing free consulting… it really doesn’t pay well ;-) but I thought I’d toss one final freebie out there regarding my thoughts.

Alcohol distributors can safely and easily enter this industry will little fear if they understand a few things… 

  1. I see few synergies between a beer/alcohol/beverage distributor and almost any aspect of the marijuana business.  For those looking to jump into this business for this reason, you’re barking up the wrong tree.  Other than perhaps some technology and backroom stuff, these are very different industries and will operate quite differently.  And for those thinking that perhaps marijuana and alcohol will be available at the same locations… not going to happen in our relevant time frame… and I’m personally not certain it would be a good idea in the first place.
  2. Although this is a regulated market (as it should be), I see no need for an independent distribution tier.  So again, for those thinking they will use their present operations to become the marijuana distributor, ain’t going to happen.  Colorado law forced complete vertical integration for at least the first 10 months (you had to grow at least 70% of what you sold).  And even now, completely integrated operations – from grow to retail – are the norm and I would guess they will likely remain so for at least the near- to mid-term.  Washington outlawed vertical integration… you can either grow or retail, but not both.  How other state’s regulatory structure will take place is anyone’s guess.  They will probably follow one of these two general designs.  But the development of a 3-tier system simply isn’t in the cards.  If that is your hope, don’t waste your money in this industry.
  3. Therefore beer, wine, and spirits distributors should view this simply as an exciting, high-growth (and high risk) investment/business opportunity.  That’s it.  Nothing more.  Nothing less.  It has nothing to do with your present operations (nor should it).  If you have the money and desire, it could very well be the start of something like the dot.com boon at its infancy.  Go back and look at those election results if you need any convincing.
  4. This isn’t a “gray” legal area.  It is black and white.  From a federal perspective, any activity involved in marijuana… and that includes supporting services of ANY type are quite clearly illegal.  As the head of Colorado’s Marijuana Enforcement Division noted at a recent seminar I attended, from the Colorado governor on down… they could all be arrested for violated federal law. Think of it as this analogy… based on federal law, the states of Colorado and Washington have set up a regulatory structure to regulate and tax the mafia’s activity.  They are aiding and abetting the violation of numerous federal laws… and all who knowingly participate are also in violation of these laws.  The accountant to the mob still goes to jail ;-)  As does the advertising agency that knowingly takes their money to help them generate demand for their illegal activity… as does the bank… as does the attorneys… as does all of us.  Now I clearly don’t see this happening (nor do thousands of businesses, some quite large) and I believe the next national election will kind of settle this with a “let the states decide” punt from both major political parties.  But until (if?) federal law changes, this is the reality from the federal perspective.  If this concerns you or if you truly believe a “perp walk” might be in your future, don’t enter this industry.
  5. Thus, any tying of your present federal permit with a marijuana business is freaking stupid!  There are no synergies anyhow, don’t connect the two in any way.  This is quite easily accomplished.   But I hear from far too many who mistake the synergies (which don’t exist) and think about tying the two together.  Don’t.  On the plus side, if you do enter, don’t tie them together and still end up getting grief from the feds, the odds are great they would simply force you to divest yourself of one or the other.  No perp walk in your future ;-)
  6. This also will temporarily break the hearts of those weed merchants who hope for the big cash-out from beer, wine, and spirits suppliers.  Ain’t happening until at least the feds change their perspective on marijuana.
  7. That said, for those willing to jump into a high return/high risk/high growth industry, distributors have the opportunity to leverage their business expertise on distributing controlled consumer goods to build an incredibly profitable stand-alone operation.  The overall level of business expertise in this industry is rather low… you start out way in the lead on this aspect.

I look at you all for potential partners with my edibles business since you have the cash to invest and understand how to build brands via DSD.  And rather than having you attempting to learn all about this nascent industry, we provide turnkey for everything.  That’s some significant value on our side of the equation.

This is a “never-before market” so I’m still not certain from our perspective it might not be better to go with established marijuana operations in various states and to teach them both the manufacturing and DSD aspects.  That I’ve got down.  But since I know you all, you get the first shot.  That’s it for free consulting.  If you want to learn more about the marijuana industry, either join our team or go talk to someone else… I’ve got a start-up to get going ;-)

 

 

Marijuana - A prohibition market or a legal state-regulated market?

Legal marijuana is coming to this nation like a tidal wave.  And it is about time.  When one combines the pro-cannabis folks with the “prohibition doesn’t work” folks, a large majority is saying it is time to end the failed war on weed.

Remember the decision isn’t really about “for” or “against” marijuana.  Marijuana is everywhere.  There isn’t a high school kid in this country (or unfortunately many middle schoolers) who couldn’t get some in a matter of minutes.  The decision is whether the present state of prohibition is superior to an adult legal, state-regulated marketplace…  whether a flourishing, illegal, unregulated, “sell-to-anyone” market is better than a legal effective state-regulated market.

To me that decision is a no-brainer.  I would hope the folks in the beverage alcohol business would wholeheartedly agree.  We know it works.  The failed experiment called Prohibition and the 81 years since has proven the effectiveness of state regulation.  This country has the best regulated alcohol industry in the entire world (and at the same time also probably one of the most competitive and dynamic).  We can and should do the same with marijuana.

On the medical side, there is no question marijuana provides medical benefits.  The Washington Post reports on a 2013 survey in the New England Journal of Medicine that found nearly 8-in-10 doctors approved the use of medical marijuana.  You can find that here.  The same article notes that a recent wide-ranging survey in California found medical marijuana patients agree, with 92 percent saying medical marijuana alleviated symptoms of their serious medical conditions.

A recent letter to the editor in The Wall Street Journal from an experienced MD notes that cannabis is well known to provide pain relief for 3 – 7 level pain (on the 1 – 10 pain schedule).  For anyone who has witnessed the tragedy of the very common addition to opiate-based pain pills, cannabis is far superior. 

This explains the pharmaceutical industry’s cynical financial support of anti-legalization efforts around the country… they are THE MAIN financial supporters fighting to keep marijuana illicit and mired in the black market.  As they say, always follow the money.

But on the medical front, the antidotal evidence is overwhelming.  Is this the magic elixir that some claim can solve every malady known to man?  ;-)  Probably not, but the health benefits for many is indisputable.

On the flip side some are concerned about marijuana’s possible neurological effects on young brains.  They completely miss the point.  Whether these effects exist or not are open to serious debate… but the main point is… is prohibition a better means to restrict young folks from consuming or is a legal, state-regulated environment? 

In the 10 months of full legalization in Colorado, the dispensaries have never been cited for selling to an underage individual.  NEVER.  It’s kind of hard to improve on 100%!  ;-)

Again the beverage alcohol industry shows the truth… it is MUCH more difficult for underage people to get beer, wine, or spirits than the so-called “prohibition” of marijuana.  Go ask any high schooler anywhere in the country… what’s easier to get?  Beer or weed?  You’ll get close to 100% saying weed.  So how is this better protecting young minds from marijuana’s supposed neurological effects?  It isn’t.  It works in just the opposite direction.

Milton Friedman, renowned economist and philosopher captured this perfectly in this quote “One of the great mistakes is to judge policies and programs by their intentions rather than their results”

And of course this striking observation… “See, if you look at the drug war from a purely economic point of view, the role of the government is to protect the drug cartel. That's literally true.” 

Prohibition or a legal, state-regulated market… the choice is pretty straightforward… whether one likes this fact or not is irrelevant.

Some anti-cannabis folks will say, “yeah, but a lot of these folks just want to get high”… to which I respond… so what?!  Based on 2013 dollar figures, this country consumes about 42 CASES of beer for every 3.3 BOTTLES of non-alcoholic beer.  While there is non-alcoholic wine, its sales are basically meaningless.  Unless one is the designated driver (or has an alcohol issue), no one goes to bars and orders mock-tails.   And I don’t think this industry or consumers have to apologize for this. 

People consume alcoholic beverages because of the alcohol.  A beer or two (or more!) with friends… a glass of wine while making dinner… a martini to relax with after work… and we don’t have to apologize to anyone. 

The VAST majority of adult alcohol consumers don’t consume to get hammered.  Guess what… although the effect of marijuana is different than alcohol, most present day adult marijuana consumers (whether smoking or edibles) also don’t consume to get wasted. 

Whether it is your personal cup-of-tea is up to you, but I don’t think the fledgling legal state-regulated marijuana industry has to apologize either… whether consumed for medical benefits or simply others.  At least that’s my take.

And it is the take of a lot of folks.  The New York Times, Seattle Times, Providence Journal, The Economist, National Review, Denver Post, The Nation, Las Vegas Review Journal, Star-Ledger, The Indianapolis Star, The Orange County Register, The Baltimore Sun, and numerous other editorial boards have all recently endorsed full legalization. 

Five Nobel Prize-winning economists recently released a UN report recommending that countries end their war on drugs.  Travel guru Rick Steves sits on the board of the National Organization for the Reform of Marijuana Laws (NORML) and is a vocal supporter of legal weed.  Right now he’s traveling the state of Oregon trying to ensure passage of their legalization efforts.  The late scientist Carl Sagan and good ol’ Rodney Dangerfield were consumers and supporters. 

As noted above… whether “pro-cannabis” or simply “anti-prohibition”, it sure seems like the time has come for a state-regulated marketplace for legal adult consumption… kind of like the 21st amendment 81 years ago.

 

So what is the state of the burgeoning legal marijuana world?

 

Right now 23 states and DC allow some form of legal marijuana.

Colorado and Washington are presently the only 2 states that have fully legalized adult marijuana consumption.  2014 ballot initiatives in both Alaska and Oregon may make these the next states to implement full legalization.  DC has just approved a 2014 ballot measure which will legalize.  Arizona, California, Maine, Massachusetts, Montana, and Nevada are all on track for 2016 efforts for full legalization. 

Florida, Ohio, and Pennsylvania have pending legislation and/or ballot measures.  One would guess that by the end of 2014, over half of the states will have some form of legal marijuana.  By the time the next administration takes office, we could see 5 – 10 states with full legal adult consumption and well over half with some form of legal consumption.

The Marijuana Policy Institute, an organization which drives legalization efforts, has produced a 48 second video which you can find by clicking on, a new short video where they show the 17 states plus DC that they believe will have full legalization by 2019. 

One expert estimates legalization in California alone will create a $31B market, including all ancillary products and services.  Actually this should be better stated not as “creating” a market, since the market already exists and is in operation now.  These sales are happening now. 

It should be stated that legalization in California (and everywhere) will bring to the surface, and allow effective regulation of the present market… just like the end of prohibition and legal, state regulation did to alcohol 81 years ago.  One hasn’t seen bootleggers hawking illicit alcohol for over 81 years… hopefully soon the days of street-corner dealers hawking marijuana to kids and anyone with the money will be just as ancient history.

Assuming Texas at the same to slightly smaller size, these 17 states alone could represent close to a $100B market; all within 5 years!  To put that in perspective, that’s the size of the total US beer market.  Just California or Florida alone could easily match the dollar sales of the ENTIRE craft beer segment.

 

What has been the Colorado experience?

As of January 1, 2014 Colorado became the first state to fully legalize adult “recreational” marijuana.  In fact, Colorado is the first place in the world to allow full adult consumption via a state-regulated market.  After the first 10 months, one would have to declare this effort an astounding success. 

In fact The Brookings Institute just released a report entitled 'Colorado's Rollout of Legal Marijuana is Succeeding', analyzing the first six months of Colorado's legalized cannabis commerce and taxation policies.  The author calls the implementation of the new Colorado law "a resounding success." He continues, "My research shows that regardless of the merits of the policy itself, Colorado has created a smart regulatory system that balances safety and security with access to legal marijuana."

  • Teen marijuana use has not soared as some feared, in fact it has declined.  This has occurred in other places that have made marijuana more legally available too.
  • Crime is down across the board (although it may be a stretch to attribute this all to legal marijuana)
  • Although the media continues to discuss the dangers of stoned drivers, accidents and fatalities are also down.  A recent report in the Washington Post notes that since legalization, Colorado auto fatalities have reached “near-historic lows”.
  • Marijuana sales in Colorado saw a 10 percent bump in August. The sales of recreational and medical marijuana in Colorado each jumped more than 10 percent from July to August 2014, according to numbers released by the Colorado Department of Revenue.  In August, customers purchased more than $33 million in recreational cannabis — up from $29.7 million in July and $24.7 million in June. Consumers bought more than $32.2 million in medical marijuana in August — up from $28.9 million in July and $28.6 million in June.
  • Thus total sales for August were $65.2 million!  Assuming flat growth (which is very conservative since sales were up 25% last month and 10% in August), this straight lines to an annual projection of $782,000,000.  Not a bad first year for a relatively low population state!  And remember, most of these sales were occurring anyhow; just in the illegal, unregulated, sell-to-anyone market.  This legal, state regulated effort is far superior.
  • The marijuana tax numbers are also adding up. Since Jan. 1, Colorado has brought in more than $45.2 million in taxes, licenses and fees for recreational and medical marijuana.
  • A recent study estimates Colorado market demand to be in excess of 10 tons per month.
  • Edible products have been extremely in demand.  In Colorado it was just reported that edibles make up 45% of all marijuana sales! Some experts predict that in 20 years no one will smoke marijuana, it will all be edibles.  I don’t know about that, but the market for edibles is truly astounding.
  • Pot tourism is larger than most predicted.  This of course will decline as more and more states provide some means of legalization but it does give an indication that demand for legal marijuana is most likely higher than many predicted and crosses a much broader demographic than just “young stoners”.  It also seems many of these new and present recreational and medical users are drawn to edibles over smoking. 

I believe other states will experience much the same as Colorado, further fueling the drive towards legalization in all states and the Feds, i.e “the sky hasn’t fallen” and the benefits are proven by the facts on the ground.  The reality is this product(s) is being sold in the black, “sell-to-anyone” market today; some sort of legalization via a state-regulated market is clearly becoming a better solution than the failed policies of prohibition.

Should you jump into this new world?  That depends.  It’s not for the faint of heart and everything regarding marijuana is more difficult… and will probably continue to be so at least until the federal and state laws get in sync.  But of course this is also the reason there is such an incredible opportunity in this burgeoning industry. 

Can you be fired for doing a legal act outside of the workplace?

Can an employee be fired for doing a legal activity outside of work hours?  One would hope the beer and alcohol industry would strongly support a person’s right to legal activities outside of the workplace… without workplace retribution. 

If not what happens when employers, with the goal of keeping health care costs down and looking out for the health of their workers, demand workers not drink alcohol… period?  Sure testing might be an issue but the point is a larger one… if I as your employer discovers you are drinking in the evenings or on the weekend, can I fire you?  I would hope most in this industry would respond with a resounding, NO!

Welcome to the wonderful world of legal marijuana.  A world where for now, laws at various levels of government simply aren’t in sync with each other. 

First a summary of the lay of the land…

At the federal level, marijuana is still categorized as a Schedule 1 drug, defined as…

Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse. Schedule I drugs are the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence. Some examples of Schedule I drugs are:

heroin, lysergic acid diethylamide (LSD), marijuana (cannabis), 3,4-methylenedioxymethamphetamine (ecstasy), methaqualone, and peyote

We can talk about that stupidity later, but that is the position of the federal government.  Oh but wait, is it?  The Department of Justice (DOJ), the highest law enforcement office of the land, has another take.  They have basically said they’ll step back and let the states handle this.  They laid out their 8 priorities in a memo… basically if these 8 things aren’t violated, the DOJ will take no action and they recommend attorneys general follow this same guidance.

According to the guidance, DOJ will still prosecute individuals or entities to prevent:

  1. The distribution of marijuana to minors
  2. Revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels
  3. The diversion of marijuana from states where it is legal under state law in some form to other states
  4. State-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity
  5. Violence and the use of firearms in the cultivation and distribution of marijuana
  6. Drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use
  7. Growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands
  8. Preventing marijuana possession or use on federal property

That last one is really a laugh… All of the Colorado ski resorts operate with leases on federal property.  If you’ve ridden many chair lifts or skied upon some “smoke shacks”, you know what I’m talking about.  But back to our larger point…

But Colorado and Washington both have legal adult consumption.  Oregon and Alaska are voting on the same in less than a month.  In Oregon, that travel guru Rick Steves is even traveling the state trying to ensure the passage (he did the same 2 years ago in Washington).  He sits on the board of NORML (National Organization for the Reform of Marijuana Laws) and is consumer of, and strong supporter of legal weed.

23 states and DC already have some form of legal marijuana. Arizona, California, Maine, Massachusetts, Montana, and Nevada are all on track for 2016 efforts for full legalization. 

Florida, Ohio, and Pennsylvania have pending legislation and/or ballot measures.  By the time the next administration takes office, more than half of the states will have some variety of legal marijuana and 5 to 7 states (perhaps more) will have full legal adult consumption.

Which circles us back to the point of this post… can an employer fire an employee for legal activity during non-work hours?

The Colorado Supreme Court recently heard an argument on this very subject.  A brief synopsis follows (you can find the original here):

Brandon Coats was partially paralyzed in a car crash as a teenager, using a wheelchair, and has been a medical marijuana patient since 2010 when he discovered that using pot helped calm violent seizures and muscle spasms. Coats was a telephone call-center operator with Dish Network for three years before he failed a cheek-swab random drug test in 2010 and was fired. Dish Network has a zero-tolerance policy against using illegal drugs.

On Tuesday, the Colorado Supreme Court heard oral arguments in Brandon Coats’ case that may have major impact on marijuana and the workplace. Colorado voters first approved a constitutional amendment authorizing the use of medical marijuana in 2000. Marijuana for recreational use was approved by voters in 2012 and started being sold in retail shops in Colorado on April 1, 2014.

Twenty-three states and the District of Columbia now have medical marijuana laws. Washington and Colorado laws specifically state that employers do not have to accommodate employees’ marijuana use. But other states such as Arizona, Nevada, New York, Minnesota, and Delaware grant various levels of protections to medical marijuana card holders from discrimination.

Additionally, the Supreme Courts for the states of California, Washington, and Montana have all ruled that an employer has no duty to accommodate the use of an “illegal drug” such as marijuana. The fact that marijuana remains a schedule one “illegal drug” under federal law has been critical in each ruling for the employer.

Coats brought his lawsuit against Dish under Colorado’s lawful off-duty activities law, which specifically says employers cannot fire people for doing something legal on their own time. Originally the law was enacted to protect cigarette smokers and multiple states have similar laws. Both the trial judge and Colorado Court of Appeals have already ruled against Coats “legal use” argument holding that as long as marijuana is illegal under federal law the state law does not apply.

During the Tuesday Colorado Supreme Court hearing the justices did little to telegraph how they may vote. A ruling may be months away.

I think the betting money is on the “get-out-of-jail-free” card based on the fact that weed is still an “illegal drug”, per the Feds.  Thus you will still be able to fire folks for consuming marijuana even if the activity was legal, at least for a while.

But what happens once this situation changes?  And the betting money is on it changing at the federal level.  As it stands now, the governors of both Colorado and Washington could be arrested and easily convicted for violating various federal laws… as could every government employee who works in marijuana enforcement.  The accountant for the mob still goes to jail too ;-) and from the federal law perspective, these folks are all part of a criminal conspiracy involving illegal drugs and money laundering.

And of course the thousands (10,000 or so in Colorado alone) of folks who work in the marijuana industry… in addition to all of the consumers.  Those 23 states and DC with some version of legal weed?  Anyone associated with it (starting with the governors), whether through regulation, employment, or consumption… all could be arrested and easily convicted.

Is that going to happen or are the Feds going to start changing in an effort to get these laws in sync with one another?  That I believe is a no-brainer but it probably won’t happen until the next administration.  I don’t expect this to occur via a federal-level “let’s legalize it” effort but rather through a “let the states decide” movement… and anything that furthers the efforts of state’s rights can’t be all wrong ;-)

Of course the Colorado Supreme Court could surprise everybody and rule for Mr. Coats.  If that happens, employment law is going to be turned on its head for quite some time.  But this tide is already well past turning.

The FBI has a policy of no-marijuana use for the past 3 years for new applicants (even this is an admission of the prevalence of marijuana consumption in the US), but in just the past couple weeks FBI Director Comey said apply… even if you’re lighting up on the drive to the job interview!  You see the FBI needs talented, tech folks… white collar hackers… and the reality is a lot of these folks consume weed.

“I have to hire a great work force to compete with those cyber criminals and some of those kids want to smoke weed on the way to the interview,” Comey said.  The FBI could possibly amend those strict rules soon. Comey told the conference the bureau is “grappling with the question right now” of how to change the drug policy without scaring off the cream of the hacking crop.

I’ve talked to many folks in many industries and a lot are taking the same path… loosening the strict zero tolerance rules for the simple fact they can’t staff their businesses without it.  Craft brewers would die on the vine if they attempted to enforce a no-use policy!  And their drinkers would abandon them in droves in protest.  That’s just the reality on the street.

So… should an employer be able to fire a worker for legal activity outside of the work place?  I think the beverage alcohol industry should think long and hard about this one… a poor choice might come back and bite real hard.  You don’t have to be “pro-pot” (but I think anti-prohibition is a very righteous position)… just pro-individual rights.  Or at least that’s my take on it.  Let me know yours.

 

Insights into SABMiller, Heineken and ABI

Rather than attempting to simply restate what others have written, I offer below a pretty good summary of the dance of the giants… and even some half-giants… thank you Hagrid ;-) and thank you Tara for a pretty good summary... followed by another one from The Economist.

You can find the full article here or simply continue reading.  This is from the Independent Online from South Africa.  This really is an international deal ;-) 

Also please note that nowhere in the story does it mention the impact of this deal on the US market.  Why?  ‘Cause that ain’t what’s driving this thing… as noted in the last post, the US market is simply something that will have to be managed, it in no significant way will determine whether these deals happen or not.

SABMiller’s choice: lift bid for Heineken or marry AB InBev

September 17 2014 at 08:00am

Tara Lachapelle

IF SABMiller wants to avoid getting bought, its best bet may be to make Heineken an offer it cannot refuse. SABMiller is looking to make a large enough acquisition that will shield it from being acquired by growth-hungry Anheuser-Busch InBev (AB InBev) , the largest brewer.

London-based SABMiller had bet that $45 billion (R495.9bn) for Heineken would be the answer, only to have its takeover offer turned down by the company’s founding family earlier this week.

Even though shares of both Carlsberg and Diageo rose on Monday on speculation they could be alternative targets for SABMiller, Heineken is still the most appealing option, according to Morningstar’s Philip Gorham.

Persuading the Dutch brewer to sell might require a bid within the upper e70 (R999) a share range – about a 30 percent premium – as well as making concessions such as giving the family board seats and adding Heineken to the combined company’s name, Gorham said.

“I suspect that as vocal as Heineken has been about not wanting to sell, everything has its price,” Gorham said. “SABMiller could come back to Heineken. It’s the number one choice. If they don’t get that, anything else is suboptimal.”

Richard Farnsworth, a spokesman for SABMiller, declined to comment on whether it would make another attempt to buy Heineken or other companies.

Vulnerable giant

Heineken confirmed in a statement that it had rejected SABMiller, saying the proposal was “non-actionable” and that the Heineken family intended to keep the company independent. The founding family controls the brewer via another publicly traded vehicle, Heineken Holding, which owns 50 percent of the 150-year-old business.

The Heineken statement “was very clear”, company spokesman John Clarke wrote on Monday.

The rejection leaves SABMiller more vulnerable to being acquired by AB InBev, the maker of Budweiser and Stella Artois. The ball is in the Belgian company’s court to move forward with the long-speculated merger – unless SABMiller can persuade Heineken’s family to sell.

“It’s just very difficult in those sorts of family circumstances where there’s more than money involved, there’s emotions,” Wyn Ellis, an analyst for Numis Securities, said. “From what Heineken said, it looks to me that the definitive answer is no.”

SABMiller had “sensible people, so I guess they would not have made the approach unless they felt there was a chance of certain success”, Ellis said.

While the price that SABMiller offered has not been made public, Heineken shares climbed 1.3 percent to e60.18 on Monday, valuing the company at almost 11 times this year’s estimated earnings before interest, tax, depreciation and amortisation (Ebitda).

SABMiller, valued at $98bn after gaining nearly 10 percent in London on Monday on talk of an AB InBev approach, could justify paying an Ebitda multiple in the “low teens” given the opportunity it would have to expand the Heineken brand in Asia, one of the faster-growing beer markets, Gorham said.

“It leaves some room to go higher” from Monday’s closing level, he said. “I wouldn’t rule out a high 70s takeout price.”

If SABMiller were to pay e78 a share for Heineken entirely in cash, it would result in a 16 percent increase to next year’s earnings, data show.

Lesser alternatives

SABMiller may have other options should Heineken continue to resist, though they also appear flawed. One was to pursue a deal with Carlsberg, the Danish brewer that was valued at $15bn on Monday after rising 2.7 percent, except it was controlled by a foundation that also might not be willing to sell, Ellis said.

Carlsberg’s brands were less appealing than Heineken’s, and its biggest developing market was eastern Europe, which was not growing as quickly as other developing regions, Gorham said.

While Heineken and AB InBev’s brands ranked among last year’s top 10 beers by volume, none of Carlsberg’s beers made the list, according to Bloomberg Intelligence.

Another idea was to buy Groupe Castel’s African beer operations, in which SABMiller already has a 20 percent stake, although that might not provide enough scale, he said.

There is also Diageo, which surged 2.2 percent on Monday, its biggest gain since April. The $76bn company focuses on liquors such as Johnnie Walker whisky and Smirnoff vodka and is unlikely to be interested in merging with SABMiller or selling its Guinness beer brand, according to Ian Shackleton and Edward Mundy from Nomura International.

“That SABMiller’s inorganic options have been so publicly lessened puts AB InBev in an even stronger position, should it choose to make a move on SABMiller,” Eddy Hargreaves, an analyst at Canaccord Genuity Group, wrote in a note on Monday. “SABMiller shareholders may be even more likely now to welcome a bid.”

Perhaps management would be, too, said Bryan Keane, a money manager at Alpine Woods Capital Investors, which owns AB InBev stock.

Being rebuffed by Heineken “may make SABMiller change their position and be more open to discussing a deal with AB InBev”, Keane said from New York. “They’re very complementary businesses.” – Bloomberg

 

The Economist also had a good summary...  which you can find here or you can just keep reading.

Foamy war

SABMiller may be swallowed up by its main rival, AB InBev

Sep 20th 2014 | From the print edition of The Economist

THE world’s biggest brewer, AB InBev (ABI), is also the most frugal. There are no company cars for senior executives. Carlos Brito, the boss, flies economy class. That is one reason why, with 18% of global beer sales, ABI has a third of the profits.

This will matter in the wary manoeuvres now taking place among the giants of global brewing. On September 14th Heineken, the number three by volume (see chart), said it had rejected a takeover proposal from SABMiller, the number two. SAB seems to have been trying to defend itself against a possible takeover by ABI, which was said to be talking to bankers about raising £75 billion ($121 billion) to buy its rival. That was little more than a rumour, but industry-watchers suspect something big is indeed brewing, in brewing. And the chances are that ever-thirsty ABI, maker of Budweiser and Stella Artois, will swallow SAB.

The beer behemoth has few other ways to grow. In rich countries, consumption of beer has stopped rising. In America, ABI’s Anheuser-Busch division is suffering growing competition from small makers of “craft beer”. The number of American breweries has jumped from fewer than 100 in 1983 to more than 3,000 today. ABI has its roots in Brazil, but there drinkers are suffering from a sluggish economy and post-World Cup blues. This leaves ABI with two options, says Andrew Holland, an analyst at Société Générale: give its cash back to shareholders or buy something.

SAB is a tempting target. Though based in London, its origins are in South Africa; it has breweries and bottling plants in 15 African countries, where people still mainly guzzle moonshine. It has stakes in 21 others through an alliance with Castel, a French drinks company. Nearly 70% of SAB’s sales are in emerging markets, many of which are still developing a taste for beer. Last year its sales by volume expanded by 3% (not counting growth from acquisitions). ABI’s, in contrast, dropped 2%.

If ABI gets hold of SAB it will no doubt try to repeat tricks that have worked well since AmBev of Brazil merged with Interbrew of Belgium a decade ago and then pushed out its American boss: squeeze costs and use the new acquisition as a platform to spread its brands. That was the formula after the merged group bought Anheuser-Busch, the maker of Budweiser, in 2008. Grupo Modelo, a Mexican brewer which makes Corona and has been part of ABI since last year, is now undergoing the same rigours.

SAB would be a more difficult undertaking. For one thing, notes Mr Holland, it is more tightly managed than “fat and lazy” Anheuser-Busch was, so there is less scope for cutting costs. SAB is bigger and more complex than anything else ABI has taken on. A knack for cost-cutting may not serve it as well in fast-growing markets. Another problem is that in some countries the two giants’ combined businesses would be too big. In America Anheuser-Busch and SAB’s joint venture with Molson Coors, another rival, would together have three-quarters of the beer market. In China the two would have more than a third. These are not insurmountable problems. In America, for example, the stake in the joint venture could be sold to Molson Coors.

Despite the obstacles, a merger of the leading two beer companies looks the likeliest of the potential huge deals. Heineken, which is controlled by the Heineken family even though it owns just 23% of the company’s equity, has now given notice that it does not want to be bought (though that could change if SAB boosted its offer). Carlsberg, the smallest of the big four, is controlled by a foundation. So the parsimonious Mr Brito may well get his hands on SAB if he wants it enough. Teaching Africans to like Budweiser, however, may prove somewhat harder.

Holy Guacamole! The giants are dancing again.

Interesting news over the weekend… SABMiller made a “hey, let’s get together” offer for Heineken and ABI might be lining up financing to make a run for SABMiller. 

I had planned for this post to be more about the Monster move… but that will have to wait… although Monster offers a painful lesson in the realities of big business and the strength of things like “I thought”… and “I was told”… and “I assumed”… and “they promised”.  Value of those things?  About zero.  Something to keep in mind as this all plays out.

But what about the renewed dance of the giants?  Many have noted how life is often just like a country music song… or is it the other way around? ;-)… but this is better described by a song from a one-hit-wonder band, The Georgia Satellites… Keep Your Hands to Yourself.  To enlighten my younger readers… here are the lyrics

 I got a little change in my pocket going ching-a-ling-a-ling

Wanna call you on the telephone, baby, give you a ring

But each time we talk, I get the same old thing

Always, "No huggee, no kissee until I get a wedding ring"

My honey, my baby, don't put my love upon no shelf

She said, "Don't hand me no lines and keep your hands to yourself"

 

Ooh, baby, baby, baby, why you gonna treat me this way?

You know I'm still your loverboy, I still feel the same way

That's when she told me a story 'bout free milk and a cow

And said, "No huggee, no kissee until I get a wedding vow"

My honey, my baby, don't put my love upon no shelf

She said, "Don't hand me no lines and keep your hands to yourself"

 

You see, I wanted her real bad and I was about to give in

That's when she started talking about true love, started talking about sin

I said, "Honey, I'll live with you for the rest of my life"

She said, "No huggee, no kissee until you make me a wife"

My honey, my baby, don't put my love upon no shelf

She said, "Don't hand me no lines and keep your hands to yourself"

The song can be seen at https://www.youtube.com/watch?v=PdpAop7gp0w if you really want to get the feel.  I have to admit I get this silly image of Brito, Boxmeer, and Clark filling out the various (and changing) roles in this music video. 

But back to my tale… both ABI and SABMiller have a little change in their pocket, and I assume it’s going ching-a-ling-a-ling.  I assume all currency, regardless of its type, makes the standard ching-a-ling-a-ling sound.

SABMiller decides they want to get a little action – if you know what I mean ;-)… or do they just want to run from ABI and their love of Heineken is of a temporary, yet urgent nature?  Regardless, they give Heineken a ring and plead, “my honey, my baby, don’t put my love upon no shelf”… But Heineken gives them the cold shoulder with a strong, “don’t hand me no lines and keep your hands to yourself.”

Now SABMiller, who fear ABI is going to grab them by the hair and drag them into the nearest cave, respond with a “Ooh, baby, baby, baby, why you gonna treat me this way?  You know I'm still your loverboy, I still feel the same way”.

Much like the old serial movies, stay tuned to see if the spurned lover can overcome his sweetheart’s admonition to keep your hands to yourself.  A bigger and bigger diamond ring can melt even the most reluctant business heart… just ask AB shareholders ;-).  And more importantly, the senior management at AB.

And onto ABI… why does SABMiller fear their loving embrace?  Don’t they too have that loving feeling? – OK, too many song references will only burden this so far delightful little post.

From my cynical observation of large public companies, they are run solely with 2 goals in mind… first to enrich the present senior management (the folks who set around the table and make the big decisions) and second, to keep the stock price up.  The second’s sole goal being to ensure the first goal can be obtained.   Sorry, but that’s it. 

Most large organizations; public companies, unions, government, whatever, end up being operated for the benefit of those who run the place… not necessarily the same as those that own the place… or the members of the organization.  These poison pill maneuvers reek of a senior management self-protection racket.  Of course all wrapped in motherhood, apple pie and doing what’s good for the shareholders… yeah, right.

Does SABMiller want to purchase Heineken for the sole purpose of becoming “too large” for ABI to swallow?  To whose benefit is this?  AB tried the same thing when InBev was pleading for them to not “put my love upon a shelf”.

How did InBev overcome this reluctance?  Yeah they raised the offer price a little, but mainly they agreed to allow the senior management (the decision makers) of AB to reward themselves like Saudi princes.  Once they had lined their pockets with more than a little ching-a-ling-a-ling… it was amazing how they welcomed InBev into their boudoir… no more keep your hands to yourself.  What was once a terrible idea for shareholders suddenly became a great idea for shareholders… once enough promised silver had changed hands.

Cynical yes.  True?  Sadly yes again.

Our InBev friends (now ABI) have proven themselves very good at deal making so I certainly wouldn’t bet against them in their run for SABMiller.  The international brands/footprints work pretty well and if ABI can’t make deals happen, they’re stuck with just running the dang things… and that’s a lot harder to do… and doesn’t offer nearly the rewards to THEIR senior management for a little extra ching-a-ling-a-ling in their pockets.  The AB deal put more than a little ching-a-ling-a-ling in their pockets… what was it?  Only about $2,000,000,000 or so for a very small group of individuals.  I’ll do deals every day for that type of ching-a-ling-a-ling.

Just like those country music songs, it all comes down to ching-a-ling-a-ling and spurned (and not spurned) love… basically what’s in it for me?

Now after 900 words (and beating an old song to death), what does this mean for US beer distributors?  Harry reports that even if the ABI/SABMiller deal happened, it would mean little to wholesalers.  I profoundly disagree.

This deal will be driven by international positions and the US is a minor part of these calculations.  Beer distributors keep that in mind.  The US isn’t driving this potential merger; from a decision-making viewpoint it is small potatoes.  It is a headache, but one that can be managed.  And to repeat myself… yes the US market is a great cash cow but it is also a pain in the rear from a supplier perspective. 

We already know how the businesses are performing under current ownership. Dumping/spinning-off all or parts of the US market at the right price is not necessarily a bad idea, especially if the business is likely to sell for more than it’s worth to the present owner.  Even if ABI could add value, it’s not too far-fetched that the businesses could become structurally less attractive in the US. 

If they finally agree to take that love off the shelf, they will make the US market work one way or the other.  And anyone who is telling you how it will all shake out in the US is simply telling stories.  No one… and that includes the present players on all sides of this... can tell you how the US will shake out.  There are far too many moving parts and far too many players… both known and unknown.

With this move, and the continued 3-tier and franchise erosion driven by the craft folks, we could see a profound remaking of the entire US beer distribution system.  Remember things are always like they’ve always been right up to the moment they aren’t anymore.

And don’t let the present Justice Department and its anti-trust positions give you any false hopes… most likely it will be the next administration who would ultimately agree to these actions… and they may take a far different stand than the present one.

For you unconsolidated Miller Coors distributors…could you be holding a structurally unattractive business that would provide a lesser rate of return?  You’re playing roulette, and I’m afraid it might be the Russian kind, especially for the medium to smaller volume distributors.  Take your chances if you like but with these potential changes of ownership, where do you stand?  And if it happens, the odds of what would legally be described as “change of ownership” are very high indeed.  One of you saps, if not both, will be heading to the exit.  You might go “baby tantrum-style” - a style I personally know well ;-) but you will go.

Only a handful of states have franchise laws that protect distributors regardless of almost anything… where you will stand if this happens is determined by the state you’re in.  But you might be facing a situation of bye-bye brands (and effectively your business) with the only argument being what fair market value is.  Who knows, perhaps Coke goes farther than Monster and tries to pick up the entire beer distribution bus?  Does anyone really think they couldn’t run it?  It might just be how much it costs to get it.

We may find that pretty much every wholesaler is playing roulette… and all they can do is cheer for the ball to ultimately fall in the right slot.  MillerCoors, Molson Coors, ABI, Heineken, Coke and Pepsi, Pabst, Boston Beer, Constellation, some of the other larger craft brewers… all might willingly or unwillingly join the party.

Rather than being a non-event for beer wholesalers since we all know how it will go in the US… this could be the start of a re-making of the entire US beer/beverage distribution industry.  It sure feels like the pressure has been building for profound change for some time.  Each of you… look in the mirror and tell me you don’t believe the same thing. Is this the event that sets it in motion?

For the US, even if the structure is attractive, how much more value could the new owners provide? Learning and developing new skills at the corporate level as we know is a very difficult and slow process, especially considering the product portfolios and supplier biases within our industry.

If I’m a fence-sitter this might be a great time to take the offer premium… that extra ching-a-ling-a-ling – and to accept those overtures from that lover that keeps calling on the phone.  Hanging on to your business could mean it will sell for less in the future… perhaps one heck of a lot less. Financial and strategic analysis is a great evaluation tool.  It could give both a potential buyer and seller their affordability index when considering paying a premium or maximizing the purchase price.

Regardless, finding out the value of what you have might be a good place to start in an attempt to formulate a strategy… and yes, Cook and I (actually mostly Cook) do some of the best valuation and M&A work in the country.

Roulette might be a fine game in a casino (although I hear it is a sap’s bet) but it has no place in your business planning.  Russian roulette is a game for far braver souls than I.  I sure wouldn’t be playing it with my business… for most of you, by far the largest asset you own.

What will come of this?  Who knows.  But once these things get in motion, they seldom go back to where they were before.  And hoping and praying the ball falls in the right slot is no way to plan for your business’s future.  That starts with a phone call to me to discuss how we can meet your needs and discuss scheduling a strategic planning session.  Just saying… ;-)

Learning from Monster

In continuing my tradition of upsetting as many people as is humanly possible, let me weigh in on the recent Monster kerfuffle.  And in the process hopefully set out a path for peace with craft brewers.

As a brief background, here’s what Reuters reported on August 15th  -

Coca-Cola Co's $2.15 billion wager on a stake in Monster Beverage Corp highlights the growth-starved soft drink company's embrace of deals that fall short of a full-blown merger and acquisition but allow it to test-drive potentially risky targets.

The world's largest soda maker said Thursday that it was buying a 16.7 percent stake in Monster. Coke will get two directors on Monster's board as well as Monster's non-energy brands, such as Hansen's Natural Sodas and Peace Tea. Monster will get Coke's energy brands, which include NOS and Full Throttle, as well as access to Coke's extensive distribution system.

Taking a minority stake instead of acquiring Monster outright gives Coke the opportunity to get the perks of being in a $27 billion global energy drinks market without taking on the financial and public relations risks that come with the controversial category, analysts said. If the deal closes as expected, Coke will distribute energy drinks but will not actually own them anymore.

For most of the world this isn’t a big deal one way or the other.  But for beer distributors, specifically ABI distributors who carry the brand, it is a painful lesson in business realities.

You see for them, the key phrase is “as well as access to Coke's extensive distribution system”.  One can be assured that this feature was a prominent factor in setting the purchase price.  Coke wants the brands to make money for THEIR people, not some ABI folks who they have never met.  Thus the ABI distributors will be terminated per their contractual rights.

And thus the ABI folks will be paid one times trailing 12 months gross profit.  The ABI folks believe this is not an equitable purchase price… but here’s the kicker… THEY signed the contract.  Although Harry reports they say they were “compelled” to sign this contract, from a legal perspective they were not.

They freely and openly signed this contract.  They were in no way compelled to do so, they could have easily said “nope!  I’m not signing this contract.”  But of course a “nope” vote would have in all likelihood meant the brands would go somewhere else.  Thus they signed the contract, granted one which contained some terms they didn’t like… but they still signed the contract to keep the brands rather than losing the brands.

It was a clear-cut business decision they made.  Guess what?  Business relationships (in fact relationships of all kinds) are often based on power.  Pure and simple.  “You want the brands?  Then sign the contract.”  If the contract was so onerous that no one would sign it, Monster would have been forced to alter it.  But it wasn’t that onerous and the brands were hot and contributed a great deal of gross profit to those distributors lucky enough to have the brands.  Thus they signed.  And I believe they ALL signed.  How onerous could the terms be if every freaking distributor decided it was better to keep the brands and sign the contract than to risk losing the brands?

And let us never forget (and yes, beer distributors seem to need to be reminded of this on a regular basis) they are Monster’s brands and they can do what they want with them, limited only by contractual bonds.  That’s the way the world works.

Are these terminations going to hurt some of these distribs?  Oh yeah.  In most Monster/ABI distribs the Monster brands are one of at least the top 5 gross profit contributors.  Sometimes 2 or 3.  So the loss of these gross profit dollars will most assuredly impact their bottom-lines.    

To which Monster and Coke respond… so?  You’ve made a ton of money on the brands over the years.  It was a good relationship for both parties but now the situation has changed and Monster and Coke are going to do what they perceive to be in their best interests… bound only by their contractual obligations.  Although I understand the distributor’s unhappiness, I see no evil here.

Which brings us back to craft brewers and distributors.  I’ve made a ton of friends by my stance on beer franchise laws and the three tier system ;-)  Yeah, right.

As I have written about before, I believe tying franchise laws and the 3 tier system together is a tremendous strategic mistake for this industry.  Beer distributors are the last line of defense for the 3 tier system.  Much like Frodo in the Lord of the Rings, if you don’t accomplish the task, no one else will.  And if the 3 tier system goes, so do most of you.

Franchise laws on the other hand are another example of putting power to use, only this time beer distributor power (funny how we like power when it benefits us, but hate it when it goes the other way).  Those prettiest girls at the dance, the craft brewers, are chaffing from these franchise laws and are fighting (effectively) to exempt themselves from them.  And in the process they are setting up the destruction of the entire 3 tier system.

Using the state’s power to enforce these laws is at the root of this problem.  Rather these relationships should be set just like most other business relationships, through negotiations and a contract(s) which legally binds the parties to the agreed upon terms.  No need for the state to become involved.  And yes, power does influence the terms.  If the brand is on fire and is thus the most desirable girl at the dance, the terms will favor them.  If the brands are a dog and the brewer will take almost anything for access to distribution, the terms will likely go the other way.

So rather than crying about the unfairness of life, beer distributors should embrace these realities.  Beer distributors have an incredible warehousing/sales/distribution/merchandising system.  No one comes close to your relationship at retail and your frequency of contact to the licensed retailer.

So rather than fighting for the state to grant you perpetual franchise rights (something I believe you are going to lose… power comes and goes), why not offer tiered services for the suppliers you represent?

For Class A suppliers, you offer full brand support.  Everything up to and including brand authorizations.  For these folks you bring everything you’ve got to the table to help them build the brands.  In exchange, they agree to contractual terms which in effect give you strong franchise rights.  Perhaps more favorable GP terms too.

For Class B suppliers, you offer a little less and they agree to contractual terms which don’t give you as strong as a position in ownership/control of the brands.

For Class C suppliers… etc. 

Do you see where I’m going with this?  You change the paradigm and rather than giving every supplier everything you’ve got (which in reality few do any how)… you allocate your tremendous power based on the degree the supplier is willing to be contractually bound to you. 

You can then allocate your resources accordingly.  Hot brands will still happen and a smart distributor will ride that wave as long as is possible, even if those brands happen to be from a Class D supplier. 

Political power comes and goes… as you and the craft brewers are learning… although both are going in opposite directions… but your lasting power doesn’t reside in the state legislature but in the incredible sales and distribution machines each of you controls.  Use that to your advantage.  Just because you agree to distribute a product does not necessarily mean you have to “give it all away” to each and every one.  That’s not what the prettiest girl at the dance would do.  ;-)

And smart craft brewers will draft their contracts to also take advantage of this shift to meet their individual desires and market realities.

If you want more on this, give me a call or email.  No more freebies from Conlin ;-)

The Insanity of the 21 drinking age

One of my many complaints about the world is the federally-mandated 21 year-old drinking age.  That we have brave men and women risking their lives for our collective freedom and safety… people who are entrusted with incredible power, who make life and death decisions on a regular basis… yet that they can’t legally drink a cold beer is BS in my book.

Almost all states allow young women to have an abortion at 18 without any parental consent… yet she doesn’t have the maturity to drink a cold beer for another 3 years?!  Regardless of one’s beliefs on abortion, this reality makes no sense.

CNN just ran a piece which you can find here on what science is telling us about this crazy policy.  Of you can read it in its entirety below…

 

21: Science's limit when it comes to the drinking age

By Jen Christensen, CNN

updated 7:11 PM EDT, Tue July 15, 2014

Source: CNN

(CNN) -- On July 17, 1984, President Ronald Reagan signed into law the National Minimum Drinking Age Act, which withheld a percentage of highway funds from any state that didn't raise the minimum drinking age to 21.

The week before, Reagan had declared ice cream a "nutritious" food.

Perhaps that's a hint that politicians don't always know what's best for your health.

Thirty years later, there is a group of people with Ph.Ds and MDs who take issue with the drinking age. They say, from a scientific standpoint, that the law may target the wrong teen behavior.

The law came into being to solve a serious public health problem.

Before the minimum drinking age law, 16- to 20-year-olds were the most common drunken drivers.

When the drinking age was raised, the number of fatal crashes involving a young driver dropped significantly, from 61% in 1982 to 31% in 1995. It went down more for that age group than any older age group.

But while the law did have a significant impact on drinking and driving, it did not stop kids from drinking. In fact, it may have made drinking even more appealing to teens, whose brains naturally seek out risk more than adult brains do -- without considering what the consequences might be.

A survey of students at 56 colleges across the country just a couple years after the legislation passed found that "significantly more under-age students drank compared to those of legal age." This study concluded that "the increase in purchase age appears to have been not only ineffective but actually counter-productive, at least in the short run."

The definition of adulthood is not clear-cut when it comes to science.

"There's no magic that happens physically to someone when they are 21 as compared to age 18," said Dr. William Graf, a professor of pediatric neurology at Yale.

The American Psychological Association (PDF) says that drawing a single line between adolescence and adulthood under the law is at odds with developmental science. They say adolescence usually begins at about age 10 and ends around 19, but really it depends; maturity is based on an individual's experiences.

Developing brains

Current data from the National Survey on Drug Use and Health and Monitoring the Future, the two official surveys that monitor such topics, suggest that roughly 65% of college students (generally aged 18 to 22) drink alcohol in any given month.

Most of the college students who choose to drink are binge drinking, according to a study out of Harvard. Seven out of 10 are consuming five or more drinks in a row.

Binge drinking can have a damaging impact on a developing brain. Evidence suggests that heavy exposure to alcohol can cause irreversible brain damage and cognitive deficits, including memory problems.

Scientists say the teenage years are one of the most important times for brain development, next to infancy. Neurons in the brain are growing and strengthening, connections are developing to allow the brain to transmit information faster and allow the brain to process more complex thoughts, and the brain goes through a kind of pruning process to eliminates synapses that are infrequently used.

All this brain development has a huge impact on a person's development and mental well-being. It also means that young people have lapses in judgment during this time period as they try to figure out how to be adults.

The limbic system, the part of your brain that is involved in processing social and emotional information, develops early in adolescents. But the prefrontal cortex, the part of the brain that involves judgment, impulse control and abstract thought and the ability to anticipate the consequences of your actions, isn't fully shaped until your late 20s.

Mimicking behavior

Abigail A. Baird, associate professor of psychology at Vassar College, has spent her career trying to understand what happens with the typical adolescent brain.

Baird argues that if anything, in terms of biology, the age limits on driving and drinking should be flipped.

"If I were queen for the day, I would move the drinking age to 18 and maybe not let them drive until they were 21, at least not with other people besides your parents in the car," Baird said.

She likes the idea of graduated driver's license laws that slowly let young drivers have more responsibility as they get more practice in the car. This is based on the theory that they will learn how to avoid accidents as they gain experience.

The statistics back her up. Before states introduced graduated licensing systems during the first six months of solo driving, newly licensed drivers were about eight times more likely to be involved in fatal crashes than more experienced drivers.

"We all know adolescents are obsessed with learning from their peers. ... Adolescents learn based on experience. They are not good at learning abstractly; that's what changes a lot between 18 and 21. When you get older, you can learn from reading stories about people and by really feeling for other people."

Baird believes that society could use the way young people learn, to help them learn how to drink responsibly at an earlier age. If drinking were less of a clandestine affair, perhaps a teen's peers could model more appropriate behavior for younger participants. She says it's important to learn how to behave around alcohol.

"Find me a business dinner that you will go to where you are not offered alcohol," Baird challenged. "In our society, you do need to know what do around it and how much you can handle."

 -------------------------------------------------------------------------------

Wisdom from CNN?!  Go figure ;-)  If you want to watch an interesting video of drinking ages around the globe go here

Is the concept of “we mutually pledge to each other our lives, our fortunes and our sacred honor" only for saps?

First a clarification… in a recent post, which you can find here, I referenced a Steve and some have mistakenly believed I was speaking about my buddy and associate Steve Cook.  I was not.  I was referencing the Brewers Association inspired NYT op-ed by Steve Hindy.  And I didn’t even get a dang t-shirt!  ;-)  I’ll let you all figure that out. 

All I can say is that for 25+ years I have worked with beer wholesalers and I can tell you that you can take their word to the bank.  I’ll do a handshake deal with almost any beer distributor in the country, regardless of how many zeroes are in the deal.  The same cannot be said of others. 

To all the beer wholesalers out there… the craft brewers are not your opponent and it is destructive to think of them in that manner (and the same to you craft beer folks regarding distributors) but the BA is most definitely an opponent if not an outright enemy.  Accept reality as it is and deal with it.

But onward and upward… one thing a good manager (or consultant) must do is to always try to manage the “what if’s”.  What if this happens?  What if that happens?  How does that affect the company?  In this process one has to mentally project the business (or system) 5 or 10 years out.  What incentives does it drive?  How does it work once the dust has settled?

That’s why the present battles over franchise protection and carve-outs are so lacking.  Many of the arguments are focused solely on the here-and-now.  I don’t hear too many folks projecting out what these things might mean 5 or 10 years down the road.  And if history is any guide, tomorrow will actually show up.  ;-) 

That was one of the many insights of the founders of this country… they attempted to set up a system which would work today, next year, and 200 years down the road.  Does anyone see any such thinking in these carve-out/franchise arguments today?  Nope.  Government is simply a means to achieve one’s short-term financial goals.  Beyond that?  Who cares!  ;-) 

Let’s all see who can control the power (and the feedin’ trough… ‘cause that’s what it all comes down to) and they are today’s winners.  These battles are a microcosm of our larger society.  The founders of this country stated “we mutually pledge to each other our lives, our fortunes and our sacred honor.”  They meant those words and they captured the reality they faced.  From that to “how can I set up the trough for me”.  Sad.

I personally still see things lining up where the 3-tier system disappears in the relatively near future.  As I noted before, beer and beverage distributors are the last line of defense.  And I believe some of the larger distribs think they can survive quite nicely without it (I think they are wrong).

Craft brewers are going to regret the world they bring about.  A handful will prosper via alliances with MC or ABI but the rest are going to be local brewpubs.  And the Heinekens of the world will also have to choose a partner and hope it all works out for them.

Intellectually one can make a strong case that carve-outs are actually ass-backwards.  Beer distributors actually do (can) build small craft brands much more than they do established nationally advertised and supported brands.  One can argue that franchise protection should be applied to the small brewer with the carve-out being reserved for large, national brands.  I won’t hold my breath but if one analyzes the reality on the street that is much more consistent with the way things actually operate.

My argument remains that these things don’t need to be enforced by government.  Let the marketplace sort it out like happens in other industries.

It’s kind of funny but I’m working on an unrelated business start-up right now and I plan to offer strong franchise protection to my business partners.  Not government enforced… I WANT to do it.  I not only want them to make a good margin on the product, I want them to own and build equity in the manufacturing and distribution rights.  This is a proven method to ensure commitment from a business partner and to allow them to share in the financial rewards of success.

 Long ago I wrote a blog entitled, Plenty to Go Around, which you can find here.  Perhaps everyone in this industry should give it a read.  Do you have a mindset of scarcity or abundance?  I won’t hold my breath for the BA and others to get on board but as I noted above, the individual craft brewers remain supply-chain partners, not the opponent.

But since I remain a cynic, I’m still betting the 3-tier system is going to be taken apart… piece by piece with little thought given to the future… and few will be happy with where this takes us.  But what the heck do I know? ;-) 

 

 

 

 

 

 

Long-Timer or Free Rider?

Had planned to write no more about this but I received a surprising number of very personal responses to the last couple posts.  I know I’ll get beat up for relaying their feelings but they pleaded for their beliefs to get aired.  I think the recent posts got them fired up to vent their feelings… so get out the sticks for good ol’ Conlin and here we go…

This one captures the general feeling…

Your last two post are the truth and the truth hurts.  Beer people like me could care less about distribution values because I love the business with no plans to ever sell.  This business provides a great living each year for doing a great job executing.   On the other hand this type of information scares the hell out of people who dream of cashing out with a big check without ever putting in any effort to better the company.  They are The Free Ride Guys.  The Truth Hurts.

And another…

John, please add one more post just to screw with lazy, dumb ass owners who think they understand what this business is all about from warehouse employees to sales and everything in between.  Too many of the 2nd and 3rd generation owners do little more than cash their checks.  They do nothing and reap great rewards while their employees work really hard for their pay.   Most of these owners claim to be right wing Republicans but they are really Liberal Democrats who keep getting funding from the distributorships… “government/distributor” handouts for doing no real work.  They hide when there’s real work to be done but are always first in line come payday. 

 And lastly, a longer venting…

Conlin, it is sad that many owners never get to the warehouse when the day starts so they never get a pulse for what is really going on on a daily basis.  All they do is run around with their calculator crunching distributor “For Sale Value” every time they read an article from Harry or Benji when someone sells for an inflated price to see how much their deal is worth.  They run a few reports and think they busted ass for the day.  They leave in the early afternoon so as not to miss their favorite hobby. The only reason politicians like them is they give them campaign checks but they love telling friends how much influence they have with the politicians.  These owners have no clue how to relate to the working people of the distributorship, only the very few office people they see. Most managers know how to play them because they always tell these owners good stories, not the reality of what is really going on. (sadly, even if they knew the real stories they would leave for home and hope the problem will disappear). These owners receive not one ounce of RESPECT from any employee. From my personal experience and observation, in partnerships there is usually one person who actually loves the Beer business.

The others hang around Yacht Clubs, Tennis Clubs, Hunting Lodges and Country Clubs where they envy the members who have cashed out of their business. It kills them that they may never get to join that club. None of these guys I am describing love this business. Many were forced in by a parent, but they DO love the $$$$. I bet only a few of them could make over $100K on their own. The only thing that keeps some of them in is a son or daughter. The other cousins or siblings in the beer business that love this business keep these people from the big cash out. I would really love to know if these owners think they bust their ass every day for the yearly salary they receive????  They better be very thankful that other blood keeps the ship sailing in the right direction.  They had better hope that the real worker does not get the attitude that they are tired of making them rich while they keep working long hours and weekends while the lazy owners are at home or the Country Club.  It does make me angry to have to split profits with these types of partners. Most of them try other business deals but fail miserably because they have no work ethic or no real life experience.  If these type of owners were left to run things the operations would crash and burn within two years while they were getting stolen blind.  These owners have no clue how to run a beer operation.

Weee doggie!  Venting the ol’ spleen indeed!  There… to my friends who sent these (and others in the same vein) I’ve made your feelings public… now get out the pitch forks and torches and get after the messenger.

Strong feelings from folks who bring it every day versus those who they see as having as their sole interest protecting their lucky sperm club handout and free ride.  Although these feelings might seem only tangential to the arguments about franchise law, carve outs and the rest… might it not be the actual essence of the thing?  Just a thought. 

In addition, for some of these “unequal” relationships I recommend a frank and honest discussion about possible methods to meet everyone’s goals… it is possible with flexibility on all sides.  And a great consultant like me to help the process along ;-)

Other than that, I’ll leave it to the reader to decide the merits of the arguments… I’ll just add that I find folks who bring it every day are less concerned about exit prices than those “free riders” who operate with one eye on the exit door.

Thanks to the distribs and employees who shared.  This industry is filled with great folks… owners and employees.  We do a disservice to all when we focus solely on what we perceive as our short-term self-interest.

 

One more thing…

Well actually a couple more… had a lot of responses to the last post.  In no specific order:

 1.     Exit values – without franchise laws exit values will plummet.  No question about it.  It will probably end the exodus of beer wholesalers from the industry.  Wholesalers will make their money from operations, not a big payday as they head out the door.

2.      IMHO, equating franchise laws and the 3-tier system is a strategic mistake.  As a factual matter they are not the same and one does not imply or require the other.  It makes our defense of the 3-tier system look entirely (largely?) self-serving.

3.      Beer wholesalers (and the wine and spirits folks too) are the last line of defense for the 3-tier system.  If not you all, who?  The gold rush mentality of the craft brewers isn’t going to change.  And neither is their self-serving belief that no “antiquated” rules should apply to them.  They will gladly tear the guts out of the 3-tier system.  I have no doubt they will cry when the results of their rampage comes back to haunt them.  And it will decimate them.  But by then it will be done.  No one will be putting this genie back in the bottle again.

Chain retail, especially off-premise, has been fighting to get rid of the 3-tier system for years.  They will gladly go along.  All of us who work the street know what will happen to the craft folks when this happens.  And they think getting distribution is difficult now!  Wait… fools.  On-premise accounts can be had for the price of a draught system.  They aren’t even bringing a knife (or even a spork) to a gun fight.  They are self-important toddlers walking into an MMA cage.  Fools.

The larger brewers can live quite nicely without the 3-tier system.  I don’t see them getting involved in the fight, they’ll just let it happen and execute their strategies on whatever future happens along.

Let me repeat… wholesalers are the last line of defense for the 3-tier system.  NO ONE else is going to fight for it.  No one.  And the compromises being offered to the prettiest girl at the dance only moves the ball in the direction of its destruction.  I know you’d all rather not mess with franchise protection.  It will crush exit values and perhaps put your businesses at risk from the big 2.  Not a great situation, but you have to analyze it versus the other possibilities.

Perhaps franchise laws made sense in a world of 80 brewers… but they sure don’t seem to be compatible in a world with thousands of brewers.

But not to worry… I have absolute confidence of the following…

The craft folks will continue to be completely self-serving.  In the end they will see the foolishness of their moves, but by then it will be too late… and of course some will make big $$ before that happens.  THAT hope is solely what is driving their actions.

The big 2 will pay lip service to the 3-tier system but basically sit out the fight (and that’s what I’d do too)

Chains will look out for what they perceive is in their best interests… and this is basically anti-3-tier… ah, the dream of direct shipping.  Oh, and brewers are going to happily pay wholesalers money for not doing anything once this happens… yea, right.

NBWA will look out for the folks that run NBWA… remember it is just a good paying job for them.  One that they’d like to keep. 

 Beer wholesalers will fight to the death to keep franchise protection.  Put those all in the hopper and what comes out is effectively the end of the 3-tier system.  Perhaps sooner than most expect.  So don’t worry.  All will be well ;-)

 

Franchise law, carve-outs, and the 3-tier system

Well it seems the pot is really starting to boil.  The Brewers Association and NBWA are getting out the short knives.  Craft brewers and distributors are manning the ramparts.  Bars and restaurants are beginning to rise against the special treatment afforded to craft brewers, just because they brew the stuff.  Some distributors are telling NBWA to stay out of their state’s business.  It seems as if everybody is upset with someone… ah, ain’t spring swell?  ;-)

As some of you know, I was going to get into this fight, earning me my new nickname of Bad News Conlin ;-)  And it seems some may have plagiarized my work (and even my title), eh Steve?  I won’t even begin to discuss the self-serving (and unprofessional) actions of various organizations and individuals… but enough of that ;-) 

I’m heading in other directions and plan to leave this fight for others.  But I thought I’d throw out my 2 cents worth in an attempt to save the most dynamic and entrepreneurial beverage alcohol industry the world has ever seen.

It’s kind of funny how dang near everybody in this industry is making more money than ever before, yet the fighting only escalates as the dollar signs go higher and higher.  I think there is a word for this… but why go down that street?  ;-)

Let’s start at the beginning… December 5th, 1933.  Without that, none of you exist in your present form.  And the wisdom of the 21st Amendment.  I’d have to guess it never would have passed if it had attempted to determine the nation’s alcohol laws.  This side wouldn’t have like that.  That side wouldn’t have like this… and it would have died.

Instead the framers of the amendment made the right (and easiest) choice.  Let the stinken’ states decide.  It was clear the country wanted legal alcohol.  The well intentioned (well, at least somewhat well intentioned) 18th Amendment was a classic example of federal government over-reach.  Rather than following the basic structure of that failed experiment, the 21st Amendment went the other direction.  States-rights.  Alcohol consumption is by definition a local issue… my getting drunk every Saturday in Littleton doesn’t affect anyone in California.  So the 21st Amendment was written to both legalize alcohol AND to let the states decide alcohol regulation.

And part of this wisdom was the creation of the 3-tier system; a mandatory system whereby distinct “tiers” would only be allowed to operate in the production, transportation and sale of beverage alcohol.  THIS system is the reason we have the most dynamic beer, wine, and spirits industries in the entire world.  On this point there really can’t be any debate.  In these fights this point must never be forgotten.  It is the design that holds the entire system in place.

Yes, it in effect does use government to create a protected monopoly, the beverage alcohol distributor.  But the pluses to society FAR outweigh the negatives.

So everybody that’s fussing and feuding right now should pause and consider if their actions and desires help or hurt the 3-tier system.  For without the 3-tier, most of the players in this industry, brewers, distributors and even retail, would find their existence quite tenuous.  Alas, that has as much chance as the proverbial snowball in hell.

The beer industry (and general beverage alcohol) is undergoing a cultural revolution.  Not that long ago, all the players (brewers, distributors, retail) were basically family businesses.  And family businesses see the world and operated quite differently than public companies with their “professional” management.

Family businesses generally think much longer term… they have no need to focus on quarterly results and daily stock price.  Family businesses generally have a much stronger bond to their employees, to their customers and to their local communities.  This isn’t a moral statement, just a factual observation.

With the dominance of retail chain grocery, the family retail business isn’t quite as dead as the dodo but it is close.  Thus the way retail thinks has undergone a transformation.  And during this same time frame the power of these chains has increased exponentially.

It wasn’t that long ago that the major brewers were all family businesses.  Well A-B really wasn’t but Gussie and then the Third ran it as such.  Now all the major brewers are huge, international businesses… and they think as such.  Again this isn’t a moral issue; it’s simply the way it is.

Of course the upstart prettiest girl at the dance craft brewers are family businesses but I’m not certain they have the time frame thinking of the typical family business, perhaps in 20 or so years they might.  They are more creations of a “gold rush” mentality (and reality)… gettin’ some while the gettin’s good.  Is every craft brewer this way?  Of course not, but I’m speaking of in general.  And do they in general have an appreciation of the system design that has allowed them to flourish?  Nope.  And do they care?  Nope.  That’s just the way it is during a gold rush.

Thus the beer distributor is the only remaining player who still truly thinks and acts as a family business.  Again, no moral aspect to this… just the way it is.

But even our lovable beer distributor has undergone a transformation over the past 30 years.  Back in the day when every community had 4 – 6 distributors, each one was a nice family business that provided a nice living for the owners.  Now the typical distributor (of which there are now 2 in every community) is a VERY profitable enterprise – and about as recession-proof as any industry in the country (and as close as is possible to printing money)… most distributors rank in at least the top 0.5% (you’re there if your income is $1M per year).  That means 99.5% of all Americans make less than you do.  And many rank in the top 0.1%.  Thus 99.9% of all Americans make less than you do.

Not what most think of when they think of the “typical” family business, eh?  And for the most part, not a group that is going to get sympathetic treatment by the media.  And you are created by the government and state law.  If a brewer wants to go to market, they MUST use you.  There is no way around it.  It’s that or throw out the 3-tier system. 

Pull back and look at it from a non-distributor view-point… you’re a creation of the government AND you’re in the top 0.5% of all incomes.  I can hear the tiny violins playing right now ;-)

There was another transformation which also occurred during the past 30 years.  Beer distributors used their political power to pass franchise laws.  So now not only does a brewer have to use a distributor to reach retail and the end consumer, they in effect are forced to give up ownership of their brands, forever.  That one is kind of hard to swallow.

Beer distributor talk about how they build brands and thus deserve an equity piece of every brand they distribute.  That may or may not be the situation, but does the state really have to be involved?  Why can’t each party simply come to terms with the other and have this agreement captured in a contract.  That’s how every other business works.  Just because this is a regulated product does not mean that government must have their thumbs on the scales.

I firmly believe the entire beer industry is doing themselves and more importantly, society a disservice in the direction this fight is going.  And that direction is carve-outs for the small brewer.  If anyone thinks the definition of “small” will remain the same, I have a bridge to sell you.  Carve-outs are an affront to the 3-tier system.  Ultimately you can have one or the other but not both.

Carve-outs are the small brewer’s response to a clearly unfair situation… namely franchise laws.  And please don’t talk about the ability to terminate “without cause”.  We all know that is a self-serving illusion.

It seems to me that either franchise laws go or the 3-tier system does.  I know and love beer distributors but I vote to get rid of franchise laws.  The attempts to evade these self-serving laws are setting up the destruction of the entire 3-tier system.  The issue of pre-prohibition tied houses will pale in comparison when international brewers team up with incredibly powerful chain retail.

Sure without franchise laws one will see a lot more “churn” with the smaller brewers.  So?  One will also see an explosion of new distributors.  Beer distributors will have to fight to keep every brand they have, every day… again, so?  That’s the way it works in the competitive world the rest of us live in.

Without franchise laws the “need” for small brewer self-distribution goes away.  Here’s my recommendation for the craft brewer who wants to enter distribution.  Go to your local retailers and sell in your product.  That’s something YOU should be doing anyhow.  While at the retailer, ask them who they think is the best performing beer/alcohol distributor that services them.  Go to that distributor and tell them you have already sold in these products/quantities at these retailers and they are awaiting delivery.  Close the sale with the distributor.  The craft brewer can spend their time building the brand and not attempting to become a warehousing and delivery entity.  Sure they have to share the margin with the distributor (So what?  Distributors add real, tangible value) but the craft brewer is not force by law to forever giving up equity in their brands just to get distribution.  If they chose to, fine – that’s part of your negotiations.

Let me repeat, take away franchise laws and the intellectual arguments for self-distribution disappears.  And self-distribution is quite clearly the end of any type of 3-tier system.

Some distributors will say, without franchise laws (or getting equity in the brands) they won’t distribute their products.  No problemo.  The issue isn’t whether you will or won’t, the issue is will anyone.  Again, welcome to a competitive world beer distributors.  You won’t determine any of this, the marketplace will.  And you will do what the marketplace demands or you will pay the consequences.

The real problem beer distributors have with ridding themselves of franchise protection is with the big 2.  They are afraid what ABI and MC would do to them without franchise protection.  First, don’t forget the brands are theirs.  Perhaps the world doesn’t require as many beer distributors as are presently out there.  So?  Do you all have some god-given right to a monopoly which puts you as some of the richest individuals in the country?

I know distributors and their employees quite well.  I believe most (but not all) would fare quite well in a world without franchise protection.  Will some have to go through gut-wrenching changes?  Of course.  Will some cease to exist?  Again, of course.  Welcome to the world the rest of us operate in each and every day.

But most will survive and prosper in this new world.  I have yet to see a huge, multi-location distributor outperform the smaller, local distrib.  Never.  Add value and prosper.   Or if you truly are this century’s buggy whip manufacturer, then you are toast no matter what.  Please don’t destroy the dynamism of this industry as you fight to keep your government-protected rice bowl.

Have the courage to see that franchise laws are sowing the seeds of your ultimate destruction.  Get rid of them and draw a line in the sand… there is now no reason for carve outs from a system that has served society well for over 80 years.  Carve outs are the ultimate enemy and they will destroy the very structure that made the small brewer possible.  They will also destroy the most dynamic beverage alcohol industry the world has ever seen.  Getting rid of franchise laws will cause you some pain.  Allowing carve-outs to take root will cause your demise.  It seems the choice is pretty straightforward.

I know many out there will disagree with me but that intellectual position is based on one assumption… that the volume limits for carve-out exemptions will remain low (and controllable).  I simple do not believe that will happen… and once you give in on the intellectual arguments against carve-outs, the only barrier left in place is the volume cap. 

It is beyond naive to think that the BA, state craft brewers associations, and individual craft brewers are not going to continually push to increase these limits… forever.  Distributors, you are the only players left in the market who think long term.  If you give in, the 3-tier system disappears.  Based on my contrarian analysis, it’s as simple as that.

 

 

What does Ludwig say?

Yesterday The Wall Street Journal ran a great quote from the brilliant economist and philosopher, Ludwig von Mises.

As he noted, "Everyone carries a part of society on his shoulders, no one is relieved of his share of responsibility by others. And no one can find a safe way for himself if society is sweeping towards destruction. Therefore everyone, in his own interest, must thrust himself vigorously into the intellectual battle." 

 

And here is the piece from the WSJ…

Notable & Quotable

Economist Ludwig von Mises on the supremacy of consumer interests over producer interests in a market economy.

March 24, 2014

Ludwig von Mises, "Nation, State, and Economy" (1919):

One of the great ideas of [classical] liberalism is that it lets the consumer interest alone count and disregards the producer interest. No production is worth maintaining if it is not suited to bring about the cheapest and best supply. No producer is recognized as having a right to oppose any change in the conditions of production because it runs counter to his interest as a producer. The highest goal of all economic activity is the achievement of the best and most abundant satisfaction of wants at the smallest cost. . . .

Preferring the producer interest over the consumer interest, which is characteristic of antiliberalism, means nothing other than striving artificially to maintain conditions of production that have been rendered inefficient by continuing progress. Such a system may seem discussible when the special interests of small groups are protected against the great mass of others, since the privileged party then gains more from his privilege as a producer than he loses on the other hand as a consumer; it becomes absurd when it is raised to a general principle, since then every individual loses infinitely more as a consumer than he may be able to gain as a producer. The victory of the producer interest over the consumer interest means turning away from rational economic organization and impeding all economic progress.

 

Wisdom then, wisdom now.

Disruptive change - How will you respond?

I have a friend who owns a small taxi company (he also knows the beer distribution business pretty well).  He’s witnessed firsthand how disruptive technology can quickly transform an entire industry… can you say Uber?  Now the beer distribution industry isn’t facing a disruptive technology but rather a beer renaissance like the world has never seen before.  This is a very good thing but it is also going to be disruptive.  Change by its very nature is disruptive.

This friend sent a great email warning to beer distributors along this line…

… All the legislatures in the country are giving Uber and other ride sharing apps the green light breaking up protectionist laws in place for taxi companies that date back as much as 100 years.  The beer industry should be on notice!

The world is a changin.

He’s got that spot on.  The only question is how each of you responds.  He’s watched with amazement as the large taxi companies spend all their time and effort on using their regulations and protectionist laws (and “purchased” politicians) to try to stop the likes of Uber.  As he notes, perhaps they would be wiser to spend more of that time and energy in actually improving the services they offer… to actually compete rather than fight to keep the other guy out of the game.

Each of you faces the same issue.  Will you fight solely to protect your rice bowl or will you adapt to long overdue change and compete?  If you chose to fight like the taxi companies, you need to ask yourself what type of permanent political damage you are doing to yours and the industry’s reputation.   

Reputations are a lot like virginity, once you lose them they are dang tough to get back.  ;-)

You can (and sadly most likely will) wrap yourself in “good for the children and society BS” but if your sole concern is protecting a very self-serving, protectionist agenda you will be laying the groundwork for your eventual demise.

Fight or adapt and compete.  I know many of you and your organizations.  I hope you take the adapt and compete road … you’ll be doing a dis-service to your legacy and every employee if you attempt to man the protectionist barriers and demand the tide stop rolling in. 

And it’s generally never good news when an industry is in the news… following is an article from the 3/12 edition of National Review Online.  You can find the original here or just continue reading.  I counsel you all to choose your battles carefully.  Win or lose, fighting for the indefensible will do serious damage that will come back to haunt you.

jc

March 12, 2014

Alcohol Battles Brewing in the States

A slew of proposed laws would loosen restrictions on the sale of booze.

 By Katherine Connell

At least six states are taking aim at the country’s byzantine patchwork of state laws governing the sale of alcohol.

As any out-of-towner knows who has attempted to buy wine in a New York City convenience store only to unwittingly purchase the awful “wine product” Chateau Diana, laws governing the sale of alcohol can seem bafflingly arbitrary. In New York, where wine and beer cannot be sold on the same premises, it doesn’t look like Trader Joe’s will be tearing down the wall between its wine shop and grocery store any time soon.

Elsewhere in the nation though, from Maine to Florida, restrictions on alcohol are being challenged in state legislatures this year, driven in part by the burgeoning popularity of the craft-beer movement.

In Florida, Republican state senators have proposed measures this legislative session that aim to ease up on some of the rules currently hampering the state’s small-batch brewers. One bill would legalize the sale of 64-ounce growlers — containers filled straight from the tap, sealed and sold to customers — as is allowed in 47 other states. Florida at the moment permits the sale of 32-ounce bottles, but that’s not the industry standard. Another bill would allow licensed beer retailers to offer free tastings, as is legal for stores selling liquor and wine. The large beer distributors in the state are unhappy to see their market dominance challenged and will put up a fight.

A proposed law that was voted down last week in New Hampshire would have done away with the current requirement that all stores that sell beer also stock at least $3,000 worth of food. “If the bill were to pass, it could open the door for boutique-type beer stores that could cater to our smaller, yet growing, beer industry across the state,” Republican state representative Pamela Tucker said, before the bill was killed on a 163 to 142 vote.

Democratic representative Ed Butler insisted that the law was worth keeping because “the sale of food at stores with beer and wine hopefully encourages consumers to enjoy one with the other.” As the New Hampshire Union Leader editorialized, the assumption seems to be “that people who buy beer in bottles and cans have no food at home with which to enjoy their alcoholic beverages.”

Pennsylvania, which maintains a state monopoly on the sale of all types of alcohol, is infamous for the hoops it makes retailers and consumers jump through. It’s not possible to purchase wine and beer in the same location, and the only way to pick up a six-pack as opposed to an entire case of beer (the only thing typically on offer at the state-run beer distributors), is to swing by a restaurant or deli, which take advantage of “eating place malt licenses” to sell beer to go. Grocery stores in Pennsylvania have taken to attaching sit-down restaurants to their buildings so that they can do the same.

Legislative attempts to move toward privatization, as recently as last summer, have been unsuccessful in large part because the state-run stores are staffed by unionized employees who benefit from the status quo. Nevertheless, Republican governor Tom Corbett called last month in his state-of-the-state address for another go, and some legislators are prepared to take up the challenge.

“Let’s make 2014 ‘last call’ for state-controlled liquor in Pennsylvania,” Corbett said. “We have to reform our antiquated system of state-owned liquor stores. Visitors often wonder about it — unless they’re from Utah.”

In Utah, liquor restrictions are a live issue for different reasons. A majority of residents belong to the Church of Jesus Christ of Latter-Day Saints, which teaches its members not to consume alcohol. Beehive State lawmakers are in the midst of a heated debate about whether to tear down the “Zion curtain.” That’s the barrier, often a frosted-glass panel, behind which bartenders in restaurants are required to go to mix drinks or uncork beer for customers, so as not to expose children to the act of alcohol being dispensed. The 2009 law requiring the barriers exempted restaurants that opened prior to January 2010, so proponents of the bill to undo the law argue that the current rules unfairly disadvantage new businesses, in addition to alienating tourists.

Maine liquor regulators this year started cracking down on bars for displaying the alcoholic content of different beers, a practice that is prohibited in a post-Prohibition 1937 law that’s still on the books. The idea behind the law was to keep advertisers from making high alcohol content a selling point, but with the rising popularity of craft beers, which include a variety of more potent brews, it’s a common and seemingly commonsense practice to post alcohol content. Democratic state representative Louis Luchini is working on legislation to address the issue, but in the meantime, bar owners and brewers are unsure what the law requires of them.

Alcohol-content levels are at the center of a battle over beer in Tennessee, where there’s a movement being led by the Craft Brewers Guild to “Fix the Beer Cap.” Any beer exceeding 5 percent alcohol content in the state is classified as “high-gravity” beer and is subject to the same sales restrictions as liquor, which can only be sold in state-licensed stores. Even if a measure on the ballot in Tennessee this fall to allow wine to be sold in grocery stores is approved (an idea favored by 66 percent of respondents in a recent Vanderbilt University poll), the cap means that some beers with half the potency of wine would still be verboten in supermarkets.

“I know there are a lot of consumers who want to purchase Chimay, Delirium Tremens, and they want to be able to able to get it with the convenience of a grocery store,” said Republican state senator Brian Kelsey, who favors raising the cap. He and other state legislators have hit on one issue, at least, that can unite Republicans and hipsters.

It's settled... legal pot is headed your way!

It’s settled… legal marijuana will soon be coming to your state.  As you respond with a well-deserved, whaaaaa?... let me explain.  The first reports on legal weed sales in Colorado have arrived and they are amazing… 50% higher than previous predictions.  It looks like the legal weed industry (both “medical” and recreational) will be a $1,000,000,000 (yeah, that’s one billion) industry.  That’s in Colorado.  Can you imagine what it would (will?) be in a state with a large population?

This will bring in a couple hundred million in annual tax revenue for the state.  How many states in the union would like to tap into this free deluge of taxes?  Where else can they find this much easy money? 

Sure, they will wrap it in “good for the children” BS but what they really are eyeing is a mountain of greenbacks… all racing to the state coffers.  Money that the politicians get to spend!  Why do you think so many big-government politicians are vocal supporters of global warming (er, climate change)?  The way they “address” this issue is to tax carbon, thereby giving them a never-ending river of money to spend… and power to grab. 

To help get this initiative passed in Colorado, the first $40 million in taxes must go to school construction… oh, those precious little tykes!  See how that makes everything all right ;-)

Of course here in Colorado our fool governor is already planning new spending on this river of free money.  That’s the reason more taxes never solves any present problem, instead the leviathan simple gets bigger and bigger… but that’s a rant for another day.

These numbers also really bring to light just how large the illicit drug trade is.  Assuming some of these sales are from pot-tourists and perhaps this legalization has slightly increased consumption, these are still amazing numbers.   Each and every day this marketplace is operating in every state in the land.  It seems it can operate above ground or below, but it is going to happen.  With this type of money flowing, it is not surprising that criminal gangs fight so hard to control it.  And now our legal criminal gangs - politicians ;-) are going to be fighting for their take too.

No question I am a cynic but I don’t see many states walking away from this fire-hose of free money.  And as I noted in a previous post, unfortunately the serious potential problems with legal pot most likely won’t be evident for years and years… but that river of tax money can start right away.  And after a couple months of legal sales, the sky hasn’t fallen in Colorado.  So far there really haven’t been any reported downsides… some concerns about stoned driving but no facts that support those claims yet.

If I were a betting man, I’d have to wager legal weed is coming to your state, probably sooner rather than later.  If this is an industry you’re thinking of joining, I recommend you move quickly.  Many states are doing the ol’ marijuana two-step… starting with medical marijuana and then heading towards full legalization… mimicking either alcohol “control” states (where the state runs the stores) or “license” states (where the stores are independently operated under a license from the state).

If you are going to jump in, get moving on the medical side first.  At least here in Colorado, they have a considerable advantage once full legalization hits.

As I’ve always told my clients (mainly because I need them to be 100% honest with me)…

1.      1.    I don’t make moral judgments… things like running the mistress’s expenses through the company ;-)

2.      2.    I’m not the IRS… things like running the mistress’s expenses through the company ;-)

So if you want to talk more about this industry, give me a call.  Unless there is a huge, unforeseen issue, one would have to guess it is here to stay.  And of course once the politicians start spending this additional money, it will be difficult to voluntarily turn off the spigot… for then they would have to find a new source of funds (dang tough to find a politically viable source which will provide this level of coinage) or they would have to cut programs and people (ain’t going to happen).  Therefore once this thing gets going, it takes on a life of its own and most likely won’t ever end.  A ton of money is going to be made by a lot of folks.  That’s just the way it is.

A grand experiment indeed.

 

What is the future for brands?

There was a great article on the decline of brand strength in the most recent The New Yorker magazine.  You can find the original here or just continue reading for the full article.

Beer and beverage brands are different than a car or TV… their strengths are less physical but rather more mental and psychological.  The emotional ties are what drive their successes.  Thus beer and beverage brands face more risk when these psychological bonds begin to fray.  Bud Light, Coors Light, Miller Lite, etc. are what they are.  Unlike the auto or TV, new “gee whiz” technology won’t be able to impact the consumer’s desires.  Thus the challenge.   Or opportunity, depending on how one looks at it.

That said, here is the article…

Twilight of the Brands

 by James Surowiecki February 17, 2014

 Twelve months ago, Lululemon Athletica was one of the hottest brands in the world. Sales of its high-priced yoga gear were exploding; the company was expanding into new markets; experts were in awe of its “cultlike following.” As one observer put it, “They’re more than apparel. They’re a life style.” But then customers started complaining about pilling fabrics, bleeding dyes, and, most memorably, yoga pants so thin that they effectively became transparent when you bent over. Lululemon’s founder made things worse by suggesting that some women were too fat to wear the company’s clothes. And that was the end of Lululemon’s charmed existence: the founder stepped down from his management role, and, a few weeks ago, the company said that it had seen sales “decelerate meaningfully.”

It’s a truism of business-book thinking that a company’s brand is its “most important asset,” more valuable than technology or patents or manufacturing prowess. But brands have never been more fragile. The reason is simple: consumers are supremely well informed and far more likely to investigate the real value of products than to rely on logos. “Absolute Value,” a new book by Itamar Simonson, a marketing professor at Stanford, and Emanuel Rosen, a former software executive, shows that, historically, the rise of brands was a response to an information-poor environment. When consumers had to rely on advertisements and their past experience with a company, brands served as proxies for quality; if a car was made by G.M., or a ketchup by Heinz, you assumed that it was pretty good. It was hard to figure out if a new product from an unfamiliar company was reliable or not, so brand loyalty was a way of reducing risk. As recently as the nineteen-eighties, nearly four-fifths of American car buyers stayed loyal to a brand.

Today, consumers can read reams of research about whatever they want to buy. This started back with Consumer Reports, which did objective studies of products, and with J. D. Power’s quality rankings, which revealed what ordinary customers thought of the cars they’d bought. But what’s really weakened the power of brands is the Internet, which has given ordinary consumers easy access to expert reviews, user reviews, and detailed product data, in an array of categories. A recent PricewaterhouseCoopers study found that eighty per cent of consumers look at online reviews before making major purchases, and a host of studies have logged the strong influence those reviews have on the decisions people make. The rise of social media has accelerated the trend to an astonishing degree: a dud product can become a laughingstock in a matter of hours. In the old days, you might buy a Sony television set because you’d owned one before, or because you trusted the brand. Today, such considerations matter much less than reviews on Amazon and Engadget and CNET. As Simonson told me, “each product now has to prove itself on its own.”

It’s been argued that the welter of information will actually make brands more valuable. As the influential consultancy Interbrand puts it, “In a world where consumers are oftentimes overwhelmed with information, the role a brand plays in people’s lives has become all the more important.” But information overload is largely a myth. “Most consumers learn very quickly how to get a great deal of information efficiently and effectively,” Simonson says. “Most of us figure out how to find what we’re looking for without spending huge amounts of time online.” And this has made customer loyalty pretty much a thing of the past. Only twenty-five per cent of American respondents in a recent Ernst & Young study said that brand loyalty affected how they shopped.

For established brands, this is a nightmare. You can never coast on past performance—the percentage of brand-loyal car buyers has plummeted in the past twenty years—and the price premium that a recognized brand can charge has shrunk. If you’re making a better product, you can still charge more, but, if your product is much like that of your competitors, your price needs to be similar, too. That’s the clearest indication that the economic value of brands—traditionally assessed by the premium a company could charge—is waning. This isn’t true across the board: brands retain value where the brand association is integral to the experience of a product (Coca-Cola, say), or where they confer status, as with luxury goods. But even here the information deluge is transformative; luxury travel, for instance, has been profoundly affected by sites like TripAdvisor.

For consumers this is ideal: they’re making better choices, and heightened competition has raised quality and held down prices. And they’re not the only beneficiaries; upstarts now find it easier to compete with the big boys. If you build a better mousetrap, people will soon know about it. A decade ago, personal-computer companies like Asus and Acer had almost no brand identity outside Taiwan. Now they are major players. Roku, a maker of streaming entertainment devices, has thrived even though its products have to compete with similar ones made by Apple (which is usually cited as the world’s most valuable brand). And Hyundai has gone from being a joke to selling four million cars a year. For much of the twentieth century, consumer markets were stable. Today, they are tumultuous, and you’re only as good as your last product. For brands like Lululemon, there’s only one consolation: make something really great and your past sins will be forgotten. ♦

 

Holy Guacamole… continued

We are 14 days into the biggest social experiment in our lifetimes… the legalization of marijuana in Colorado (and soon Washington).  This is the first place in the modern world where weed is legal for retail sale.

It is a social experiment of immense (and unknown) proportions.  Many liken this episode to the 21st amendment which repealed alcohol prohibition and legalized (once again) its production, sale, and consumption.  I believe this analysis is actually backwards… I think a better comparison is with the 18th amendment, the one that outlawed alcohol.

You see, the 18th amendment was a grand, well intentioned (for now we’ll ignore the anti-Catholic/anti-immigrant aspects) experiment.  That’s what it was, an experiment.  Fed up with the excesses of rampant alcohol abuse, a motivated group convinced the country that the solution was to outlaw the product.  We all know how that experiment worked out.

Legalization of weed is also a grand, well intentioned experiment.  I personally believe it will work out a lot better than prohibition but that’s all that is, a belief.  No matter how one looks at the issue, it is an experiment whose long-term consequences are unknown.  And it sure looks like it is going to be copied throughout the country, years and years before these consequences are truly known.

Why is it going to be copied around the country?  Good ol’ cold, hard cash is going to drive it like a racing freight train across the country.  Not illicit cold, hard cash but cold hard cash as in a tax windfall for states that jump in the pool.

Here are some quotes from a Denver Post article, you can find the full article here… (emphasis added is mine)

Only one week into Colorado’s history-making recreational marijuana industry, one shop has already sold out of pot, others fear they may soon join it and perhaps as many as 100,000 people have legally purchased marijuana at Colorado stores.

Industry advocates estimate Colorado stores have already done more than $5 million in sales — including $1 million on New Year’s Day — though National Cannabis Industry Association executive director Aaron Smith acknowledges those are “back-of-the-envelope” figures. The owner of one store said she expects to make as much in sales in the first 10 days of January as she did all of last year selling medical marijuana.

Many shops have imposed caps on maximum purchase amounts well below the caps required under state law. Numerous store owners say they have sold out of marijuana-infused edible products. Toni Fox, the owner of 3D Cannabis Center in Denver, said she closed her store down on Monday and Tuesday this week, just to restock and give her staff a rest.

Even for stores that reported robust inventory, like High Country Healing in Silverthorne, owners said marijuana could become scarce across the industry if more stores don’t get their licenses approved and open to absorb the flood of interest.

“None of us could really prepare for what was going to hit us,” High Country Healing’s owner, Nick Brown, said on Tuesday. “I think we all thought we would see huge demand and lines. But I don’t think any of us expected what was happened over the last six days.”

More than 10,000 people bought marijuana at Colorado’s recreational pot shops on Jan. 1, according to industry estimates and tallies provided by the stores. And, while that initial surge was expected, the sustained interest was not. Brown and several other store owners said they saw only a slight drop-off in sales in the days after Jan. 1.

Colorado is looking at a flood of weed-related tax revenue flowing into the state.  It sure looks like it will be a windfall bigger than anyone expected… and other states aren’t going to just sit back and watch it happen.  Thus the experiment is taking wings right before our eyes.  Hopefully it turns out a lot better than the 18th Amendment.

It is mind-numbing to watch it happening… and this from a guy whose views lean libertarian.  The Denver Post… the major newspaper in the front range of Colorado has even started a website “exploring the culture of pot” which you can find here or just go to www.thecannabist.co.  This isn’t High Times magazine… in effect this is each of your local newspapers!

Want to know how to make the best weed-infused butter possible?  Want to check out the reviews for the “strain of the day”?  Cooking with cannabis, here’s how!  “Find a store near you”… just enter your zip code.

Want to know what the pricing and product situation is?  You can’t order marijuana on-line but you can be an educated price shopper.  Click here to see prices at one store… on a WHOLE range of products.  Of course there is smoking weed.  But edibles are huge.  Candy, flavored sprays, concentrated oils for use in vaporizers.  It’s all here.

Want the best vaporizer out there?  Check out our reviews!  Elliot, here’s a new market for FIN ;-)  Sorry, I couldn’t pass that one up.

Lots of opportunity here for everyone.  Perhaps a new income stream for Harry and Benj ;-)  Perhaps with a publication name like Wacky Weed Weekly ™?  Or Stoner’s Daily ™ or The Daily Stone™ or ??   Please send me some of your suggestions for a title.

Amazing to watch this process.  That disconnect between illegal and legal still rattles around my head.  How this all ends?  Will this prove to be a mirror image of the wisdom of the 21st Amendment or the well-intentioned but foolish 18th Amendment?

Is everyone in Colorado going to end up like this?  Seriously, you might enjoy that link and video ;-)  Or is it going to work out alright?

And what about alcohol sales?  It seems the general consensus is that legal weed will have a minimum impact.  I tend to agree but we must remember this is simply a WAG, nothing more.  (don’t know what a WAG is?  You should).

But I can’t help but believe there will be some sort of “lottery effect”.  Was all this money (and there is A LOT) being spent anyway, just in the illicit trade?  If so, this legalization is a good thing.  It also puts into perspective how MASSIVE the illicit drug trade is.

 Or more likely, a portion of this money was being spent in the black market anyway and is now circulating in the legal trade.  But one would think that at least a portion of this money is ADDITIONAL spending, and thus the lottery effect on alcohol sales.  It’s probably the later with the only question being how many additional, new incremental dollars are being spent on the weed-market and where these incremental dollars are coming from.  We’ll know the answer to that sometime down the road.

Strange world where smoking weed is more accepted than smoking cigarettes.  Will kids even bother with cigarettes?  I think weed is probably cheaper.  Or will being loaded become “uncool”?  Again, heck if I know.

And lastly a correction… I wrongly stated that out-of-staters could purchase up to 1 ounce at a time.  That privilege is reserved for in-stater’s.  If you are not from Colorado, you can only purchase ¼ ounce per retail visit.  I guess it will take more stops to fill up that glove box than I first thought ;-)  Oh, and the cops in surrounding states suggest you keep it in the trunk, not upfront with the passengers - really.  Well actually they also recommend you don’t bring it into/through their states… yeah, right.

Let me know what you all think of it.  It is amazing to watch.

Holy guacamole! Legal weed arrives in Colorado

Well in 2 days it will be weed-thirty in Colorado!  Yes that’s right, as of January 1, 2014 legal retail marijuana shops will be opening throughout Colorado.  Screw that medicinal bull; this is weed for those who simply desire it.  This became law via citizen initiative and won with strong support… 55% to 44% with almost 69% voter turnout.

Since this is a topic near and dear to many a beer wholesaler’s heart ;-), I thought I’d give all you non-Coloradoans an update on the Mile High scene.

First, it is interesting to watch and listen to people as they discuss the topic of legal marijuana.  You can hear a disconnect from many as they still think of the product as an illicit drug rather than the legal, state-regulated product that it will be in 2 days.  One would have probably heard the same types of things during the end of Prohibition.  But of course Prohibition lasted only a little over 13 years so for most adults they could remember a time when alcohol was legal.

That’s not the situation for marijuana.  There is no one alive who remembers a time when it wasn’t illegal… and for the Feds it remains a Schedule 1 drug… and for what that means I’ll let the Federal Drug Enforcement Agency’s website tell the tale (which you can find in its entirety here if you choose)

Drug Schedules

Drugs, substances, and certain chemicals used to make drugs are classified into five (5) distinct categories or schedules depending upon the drug’s acceptable medical use and the drug’s abuse or dependency potential. The abuse rate is a determinate factor in the scheduling of the drug; for example, Schedule I drugs are considered the most dangerous class of drugs with a high potential for abuse and potentially severe psychological and/or physical dependence. As the drug schedule changes-- Schedule II, Schedule III, etc., so does the abuse potential-- Schedule V drugs represents the least potential for abuse…

Schedule I

Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse. Schedule I drugs are the most dangerous drugs of all the drug schedules with potentially severe psychological or physical dependence. Some examples of Schedule I drugs are:

heroin, lysergic acid diethylamide (LSD), marijuana (cannabis), 3,4-methylenedioxymethamphetamine (ecstasy), methaqualone, and peyote

So heroin, acid, ecstasy, Quaaludes, peyote and weed are classified the same by the federal government!  Yikes!  Schedule 2 drugs (by their reasoning not as dangerous as Schedule 1 drugs) include cocaine, meth, oxycodone (OxyContin) to name a few.  Earth to the Feds… coke, meth, and hillbilly heroin are one HECK of a lot more addictive and dangerous than weed. 

As a side note to all you parents out there… the Feds also include Ritalin as a Schedule 2 drug, i.e. in the same category as coke and meth.  Yet Ritalin is handed out like candy to children (generally boys) around the country… sorry, that’s just me temporarily getting on my soap-box again ;-)

Back to legal marijuana… since this product has never been legal in the memory of any living American, it is somewhat understandable that people still think of it as illegal and build their arguments from this perspective.  Denver City Council went round and round arguing that it should be illegal to smoke weed (on private property!) if anyone else could either smell it or see you doing it.  This foolishness was finally voted down but it shows how the illegal/legal mental divide will remain with us… probably for many years.

Of course under-age use is always a concern.  This one is harder to predict but my gut says most younger folks who want weed have no problem finding it right now… from middle school on up.  Some have predicted a rise in older use since they long ago lost their connection ;-) and I’d have to guess this might be the biggest user impact of legal weed. 

And of course there is that old belief that marijuana is a “gate-way” drug that leads to harder drug use.  In a counter-intuitive fashion, I think it might just go the other way.  When marijuana is illegal you must purchase it from someone who in all likelihood has quick and easy connections to those selling (and using) other drugs.  With legal weed this connection is broken.  Someone buying legal weed will no longer be dealing with people who will readily sell them other drugs.  At least that’s my guess right now.

In addition, one comedian was talking about legal weed and teenage use and his take was that legal marijuana will end up LOWERING teenage/youth use… when the kids sit around and watch grandma and granddad passing the bong, it will change the whole ‘illicit’ attraction.  He said it much funnier than that though ;-)

This transitionary period (forward if the experiment works or backwards if it becomes a huge failure) will be one of working out a lot of kinks and contradictions.  Since marijuana is illegal from a federal perspective, the weed industry can’t find any bankers who will accept their business… this is a problem for the “medical” marijuana retailers in every state too.  Financial institutions can’t knowingly do business with any individual/organization who is committing a crime.  Thus out of self-preservation, the banks refuse to do business with the weed industry.  To solve this problem Washington State is proposing the creation of a state-owned bank solely for the weed industry.  Many think this too is destined to fail since from the Feds perspective, it doesn’t matter who owns the bank… knowingly doing business with criminals is still against federal banking and financial law… and every one of these retail establishments, their grow operations, and every consumer is labeled a criminal under federal law.

Employers in Colorado and across the country can still fire you from your job for smoking during off-hours, even though you are using a now legal product... and using it on your time.  I personally don’t think this one will stand but that’s the law right now.  Expect the marijuana lobby to respond to this injustice with alcohol as their foil… “Perhaps we should pass a law where an employer can fire you for consuming a beer or two after work or over the weekend.”  The beverage alcohol industry should be prepared to address this since it most certainly is coming.  It will be interesting to see which side NBWA and state associations take on this one.

Weed might be legal in the state BUT on federal land (think national forests, BLM land, and national monuments)… if you smoke you are breaking the law and can be arrested.

Smoking in public is also against the law as is in public establishments, i.e. bars and restaurants, concert venues, etc.  But I think any analysis of reality will tell you this will rarely be enforced.  I find it difficult to believe cops are going to be on the prowl outside (or inside) of bars looking for folks who are lighting up a quick one.

And a quick one it will probably be… A letter writer to the local paper noted that the image of people standing around smoking joint after joint is based on the past.  This legal weed packs a punch. 

As a side note, a number of years ago I heard an agricultural geneticist talk about the incredible advances in the potency of marijuana that was achieved by a bunch of backyard geneticists.  To put it in perspective he noted that if similar advances were made with vegetables, one would be growing tomatoes that were four feet in diameter and watermelons twenty feet long!  I’d have to guess this trend will only continue.

Back to the letter writer… this writer explained it is far too expensive and far too powerful for this type of use… this is the infamous one or two-toke material.  Folks will grab a quick hit or two and then go about their business… or so this letter writer’s prediction.

In fact there are products called vaporizers (and others) that allow smokers to capitalize on this feature.  The magazine High Times did a review of some, which you can find here.  Here’s their lead paragraph…

Since our first vaporizer buyer's guide in 2011, a plethora of new pen-sized vapes have hit the market – offering cannabis consumers a stealthy, convenient way to get high in almost any location or situation. But with so many options, how can John Q. Stoner know which ones are worthy of their cash and stash, and which ones are worthy of the trash? Well, fear not, loyal readers – that’s where we come in. Our diligent staff has reviewed and rated (on a scale of 1 to 5) 15 top vapor pens so that you can get ripped without getting ripped off. We’ve provided vital specs on each of the following devices and judged them based on seven criteria: affordability, durability, versatility, high, stealth, health, and ease of refill. But first, some general info ...

This whole legal world should be an interesting experiment, eh?  Weed-based tours are already set up for January 1… think craft beer tours… and this could be a pretty big out-of-state attraction.  I’m certain in the very near-term we will see combined tours… weed and craft brewers.  I’d also have to guess car-based trips to our fair state will be going up substantially in the near term… with many going home with a glove-box full of high quality weed.  It is only legal to purchase (and possess) up to one ounce… but there are a lot of stores and it is not illegal to go back to the same store multiple times… so going home with a 6-month supply probably won’t be too tough… or if you want to sell back home, you can probably pay for your entire vacation with the proceeds.

Law enforcement around the country is already complaining that Colorado (and Washington State) are flooding their states with marijuana.  Assuming this experiment doesn’t go badly, I’d have to guess legal marijuana will quickly be adopted by many more states.  As the beer, wine, and spirits industries know so well… even folks who don’t like the product LOVE the tax revenue.  I can easily see state legislatures complaining that they are getting all of the impact of semi-legal marijuana without any of the tax dollars that come along with it.  Call me a cynic but I’d bet the dollars will win every time ;-)

From the beverage alcohol industry’s perspective… what does legal weed mean for beer, wine, and spirits sales?  Heck if I know!  If anything I’d guess perhaps a slight downward push but it is hard to say.  Are stoners more likely to stay home and drink or simply stay home or head to the local on-premise establishment?  We’ll know in a year or two.

Is there opportunity for distributors here?  From your present business model I’d have to guess not.  I simply don’t see a need for warehousing and distribution of this product.  There is though A LOT of money to be made… whether it’s grow operations or retail (or perhaps retail chain?) I’d guess folks are going to make a ton of money.  Probably be a little Wild West aspect to it for a while.  Do you jump in or not?  I think this will first be decided by your feelings on the Prohibition-aspect… is this an illicit drug or a legal, state-regulated product?  Your call.  In a week or two, the view from retail.

The 3-tier system needs more beer distributors

Although I don’t necessarily try to be a contrarian, I do try to follow where the facts lead… regardless of whether I like the path or not.  And for the 3-tier system I believe the pendulum has swung too far regarding the number of beer distributors in the country.  Yeah that’s right; I think the conventional wisdom on the “need” for continued wholesaler consolidation is wrong headed and actually counter-productive for Brand Beer… and all the players along the way.

Anyone in this industry has heard it time and time again.  It is a mantra repeated over and over again until no one even thinks to question the foundation of the belief.  Exactly WHY is continued wholesaler consolidation “required”?

 The tried and true response is for cost savings… to remain competitive.  Really?  Margins, both % and $$, are generally at all-time highs.  What has happened to all those folks preaching about how wholesalers MUST learn to operate on razor-thin margins?

Although folks only whisper it, many (most?) wholesalers are making record profits… all while unit sales are down!... all this in some of the toughest economic times the country has faced in decades.  My gosh, how would things look if the industry volumes were up?!  I look all around and I don’t see any economic pain in the beer distribution business. 

I hear how ABI and then MC are going to rape beer distributors… heck I’ve even written things in this vein… but I sure don’t see it happening. 

If ABI and MC (and others) are trying to do this they must be incredibly incompetent.  I mean record wholesale percent margins… record wholesale dollar margins… and record wholesale profits.  If that is being raped by your primary suppliers then I know of a lot of industries that would gladly take some of that.

But still the mantra… consolidation WILL happen.  Consolidation MUST happen.  It is pre-ordained that consolidation is the way of the future.  Why?  Based on what facts?

From my observations, as beer distributors become larger and larger they become more wholesale logistics entities and less wholesale sales entities.  They can be very efficient on the distribution logistics… the nuts-and-bolts of receiving, warehousing, and delivery but they seem to be less and less sales entities.

 In fact some of the best known management and M&A consultants in the industry have preached for years that this is the preferred path for beer distributors.  Forget that “sales stuff”, let the suppliers take care of that and you can simply be a warehousing and distribution business.  Sadly, the industry followed their advice and now the vast majority of the beer a wholesaler distributes is already sold for them; they are simply replenishing the stock at retail.  I question whether putting up shelf strips, static stickers and building pre-sold displays are really the marks of a “brand building” industry.

Is some of the softness in Brand Beer (especially the national stuff) simply the logical consequence of losing the local market feel that a smaller distributor had?  Is Brand Beer getting its butt kicked by the spirits folks in part because beer distributors are becoming more and more like the large wine and spirits distributors?  Especially in their relationship with retail?  The special sauce that helped make beer such a powerhouse at both retail and consumer was (is?) perhaps based on their close relationship to retail.  A relationship which is weakened each time a distributor gets larger and larger.

I’ve heard this many times from beer folks.  I was just talking to one of the best beer guys I know and he noted he was far more intimately aware of his market when he was one million cases versus the six million he now is… and he’s still the beer guy he always was… he didn’t put in the clutch, it’s just that it is next to impossible to match local market knowledge and execution with a smaller distributor versus a mega-distributor.  That’s just the way it is. 

I don’t think it is good for Brand Beer in general or brewers and beer distributors in specific to continue to chase this supposed necessity to consolidate.  Craft brewers, craft distillers, consumer product manufacturers of all stripes are seeing a mad rush to local.  Brand Beer and big brewers and distributors ignore and/or fight this trend at their own peril.

If brewers want/need a larger footprint, then form larger associations of local beer distributors.  Long ago I gave away this wisdom and I’ve yet to see a state really run with it.  Lots of opportunity if distributors can just check their egos and the need to be the boss at the door… and of course get over the need to try to eat all the other distributors in the state ;-)

I understand operational synergies as well as anyone but one would think that at some point, the cost at retail to an ABI or MC of reducing their distributor base will far exceed the benefits of having one less warehouse out there to ship to… of course there’s always the issue of having one less beer wholesaler’s family (and senior management team) to support ;-).  Is consolidation being driven primarily by this fact alone?

Remember that beer isn’t wine or spirits.  The requirements at retail for beer are MUCH different than spirits.  A case of 1.75’s is one heck of a lot more drinks than a case of beer… and it doesn’t have a product-life of only around 3 months.  I won’t even bother bringing up the retail realities of draught product.

Soft drinks are much different too.  Beer distributors aren’t doing the manufacturing on-site.  This leads to different economics when considering warehouses (or plants) required.  This drives one to far fewer plants in any specific area vis-à-vis a beer distributor.  Beer warehouses are operationally cheap by comparison.

And one can only take the operational savings of closing warehouses so far.  You still have a very high retail service frequency and thus miles and additional drivers and trucks very quickly equal lots more dollars.  At some point in time it is cheaper to keep a warehouse open than it is to run the delivery operations from a distant location.  I know, I’ve done that analysis many times.  And with higher fuel prices, this distance shrinks for every fuel $ increase. 

And what about everyone’s favorite darling, social media?  Social media for beer folks is the essence of local.

Throw these all in the mix and it becomes evident that beer operations simply won’t consolidate down to the level of the pop or wine and spirits folks.  Not going to happen.  Include the overall general trend of the strength of local and it becomes evident that this inexorable march to consolidation is based on false pretenses.  Just because it is repeated often does not make it so. 

Obviously in major urban markets more consolidation is possible because of limited distances and high population density… but those same features are what allow for less consolidation in these exact areas! 

Is some of the softness in Brand Beer due to wholesaler consolidation and the corresponding loss of the local relationship?  I’d have to guess yes.  I don’t think one or two mega-distributors per state are good for Brand Beer or the brewers… big, small, or in-between.  And it most certainly isn't good for the foundation of the 3-tier system.  And I don’t think it’s going to happen regardless of what someone keeps repeating.

On a completely different subject… do you know of anyone who sold out in the last 25 years who did so out of financial necessity?  Or who really wanted to leave?  I know of none.  They only left because someone drove a dump truck full of cash to their front porch.  They left because someone was willing to pay them 20 years of after-tax income in one lump sum.  This is the ONLY thing driving consolidation in this industry.  It’s not need… it is someone else’s money.  I think this is rotting this industry from its core.

In addition, think of that… in at least 25 years not a single entity (or very freaking few) faced financial pain that demanded they close up shop.  No one has gone out of business in this industry in decades.  Other than government, I can’t think of a single industry in the entire country that can say the same.  Amazing.  Is this a forever thing or simply a sweet-spot that is going to end sooner or later?  More on this point in future posts and articles.  2014 is going to be an interesting year for the beer distribution business… I guarantee it!  ;-)

 

Advice from Niccolo Machiavelli?

In the spirit of the coming holiday season I offer this Machiavellian little ditty.  I’m hearing this one spreading more and more, like a quiet wildfire, and in my role of providing news, opinion and insights you can’t find anywhere else… here goes.  And please remember I take no stand on either side… as Joe Friday would say, “just the facts ma’am” ;-)  And if you don’t know who Joe Friday is, you should.

But first let’s take a mental field trip with our old friend Niccolo Machiavelli.  Perhaps you have heard the phrase of being Machiavellian?  Machiavelli is famous as the author of a small book, The Prince, published in 1532.  In it he applies the analytic tools of science to politics to determine the best way to rule effectively… remember this is the 1500’s… kings and princes ruled the land.  To be ineffective might mean your head ending up on a spike.

One of the general themes of The Prince is that accepting the aims of princes—such as glory and survival - can justify the use of immoral means to achieve those ends.  Basically Niccolo gives his advice from both thought and observation on how to best achieve one’s princely goals.  People to this day still argue about his thoughts on “right and wrong” versus success. 

He is the source of great quotes.  Some are…

“Everyone sees what you appear to be, few experience what you really are.”

“If an injury has to be done to a man it should be so severe that his vengeance need not be feared.”

“There is no other way to guard yourself against flattery than by making men understand that telling you the truth will not offend you.”   This one every owner and manager needs to understand.

“it is much safer to be feared than loved because ...love is preserved by the link of obligation which, owing to the baseness of men, is broken at every opportunity for their advantage; but fear preserves you by a dread of punishment which never fails.”  This is probably pretty good advice for a prince in 1532 and it kind of captures the essence of what is meant by being Machiavellian.  Perhaps a Who’s Your Daddy culture IS better than a Who’s Your Buddy?  I think Niccolo might think so.

“The first method for estimating the intelligence of a ruler is to look at the men he has around him.”  Look at your management team… how do you stack up? 

“A man who is used to acting in one way never changes; he must come to ruin when the times, in changing, no longer are in harmony with his ways.”  Good advice for today’s beer industry.

“Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.”  Talk to your management team and attempt to permanently instill this thought in their minds.

“The promise given was a necessity of the past: the word broken is a necessity of the present.”  We have all probably experienced this from suppliers and retailers of yesterday and today… and perhaps in the backseat of a car in our rambunctious youth ;-)

Anyhow I think you get the gist of Machiavellian.   So what does this have to do with beer wholesalers? 

First a couple more side trips…

Many ABI distributors find themselves in the unenviable position of fearing their primary supplier.  Not only is ABI using the US beer market as a Cash Cow, they are also using “their” distribution system as a significant source of milk.  And one would expect that ain’t going to be changing… I’d bet it will get worse long before it gets better.  Although part of me asks what is the basis for all of this (I know, shocking eh?).  I see ABI distributors making record profits… in lousy economic times… so what’s their beef?  But what do I know?  ;-)

But many ABI distributors are looking for protection nonetheless… from their favorite source of protection, state legislatures.

As I have written about in Who’s Your Daddy, which you can find here and a follow-up piece Who’s Your Buddy, which you can find here… ABI and MillerCoors seem to be taking different paths in this game.  ABI is most definitely an “I’m your daddy”- type corporate culture.  MillerCoors seems to be taking a much more “I’m your buddy”-type culture.

Now this could be simply the result of who is running the companies… and as I have noted, Brito and crowd come from a much different culture than the typical American.  But I think it becomes reality based on a simple fact… power… eh, Niccolo? 

Starting with the Third, A-B has been slowing turning “independent” distributors into franchisees.  Most A-B distributors welcomed this trip and even hastened it along… it was easier (and still is?) to let corporate do all of the thinking.  Ultimately, most hurried down this path because they were making boatloads of money (and most (all?) remain doing so today).  In addition, when a supplier makes up close to 100% of a distributor’s volume, they do have more than a little say in how things are done.

Which brings us to a second point, the concept of robustness.  A measure of how robust a system is is “its ability to effectively perform while its variables or assumptions are altered”.  A robust system can operate without failure under a variety of conditions.  The more robust a system, the better it is equipped to deal with change, both foreseen and unforeseen.

Looking at the ABI versus MillerCoor distribution systems, the typical MillerCoors distributor is far more robust than their ABI competitor.  This is not due to someone’s careful planning, it’s the result of market shares and what distributors have had to do in order to survive and prosper.

A distribution system with only one supplier is pretty much by definition not as robust as a distribution system with 10 different suppliers, none being a big majority of share.

Thus the typical ABI distributor is at far more risk from change than is their MillerCoors competitor… because their distribution system is less robust and thus is less able to “to effectively perform while its variables or assumptions are altered.”

Combine this system reality with an aggressive supplier who looks at you as a Cash Cow and the typical ABI distributor is under tremendous strain… or so they perceive themselves.

Which brings us back to Machiavelli.   What advice would Niccolo give to ABI and MillerCoors distributors?  For the ABI folks… work aggressively to make your distribution system more robust.  As long as they have close to total power over you, they have close to total control over you.  Great goal but that too ain’t going to happen overnight.

Perhaps try to enlist your distribution competitors to help provide some protection for you from the potential ravages of your supplier.

But this is where the Machiavellian part raises its head… from what I hear in the shadows around the country, old Niccolo is finding some willing converts to his way of thinking in the MillerCoors network. 

I think Niccolo would warn the MillerCoors folks from going too fast in the direction of fighting to help your competition.  If your primary competitor… a competitor who has kicked sand in your face for years… a competitor who due to market share has ruled you and the retail scene for years… if this competitor is now being bled and thus weakened by their new master, why would you want to stop it?

If this competitor is being weakened by the actions of their supplier, why wouldn’t you sit back and let them be?  Wouldn’t it make more competitive sense to allow any and all things which weaken your competitor to take place?

Niccolo might ask why should a MillerCoors distributor join the fight for uniform FOBs… this is a weapon which cuts their competitor much more than it does them. 

Niccolo might ask why should a MillerCoors distributor join the legislative fight on any of these fronts which at their core are primarily directed to stop moves by ABI.

Niccolo might ask why should a MillerCoors distributor fight any of these fights FOR their competitor, especially when their competitor has failed to answer their requests for help in the past… sorry, I’ve heard that complaint for many years from many states.  “Just the facts, ma’am”

Of course the answer to these questions is “it might happen to you someday too”.  But the MillerCoors distributor is more robust so the odds of it damaging them are much smaller.

And Niccolo might scoff at the idea of “someday”.  What matters is the here and now, not some hypothetical future which may or may not ever occur.

Niccolo might ask what does the MillerCoors distributor get (because EVERYHING has a price) for supporting legislation that primarily benefits their main competitor.  He might advise to support, but to ensure you are paid handsomely for this support.  Extracting a pound of flesh when the opportunity presents itself… or letting the bleeding continue.

I have preached the importance of unity for beer distributors for some time.  You can read any of my past posts to see this is true.  And I don’t take a position on any of what I’ve discussed… just asking the questions.  But these are interesting questions and I believe a strong case can be made for both sides…

The “we’re in this together” side AND the “let them be bled dry” side.  I know a surprising number of MillerCoor distributors who are beginning to lean to the “let them be bled dry” side.  After almost 500 years,  good ol’ Niccolo’s advice is still perhaps right on the money.

Which side are you on?  It is interesting times in the beer business, eh Niccolo?  And to all you state association execs that herd cats on a daily basis… sorry.  Have a great holiday season ;-)

 

Technology is changing industries AND consumers

The major trade publications continue story after story regarding the softness in the big beer brands.  In fact they note that big brands of all types of beverage alcohol are struggling.  Unfortunately they all also continue to look to the past to explain the present and predict the future.  Wrong!

The following post was first printed in October 17th edition of Modern Brewery Age.  You can find the original at http://www.breweryage.com/tabloid/archive/2013/JohnConlin.pdf

Or you can simply continue reading.  As a side note, if you don’t subscribe to Modern Brewery Age, you should.  It is well worth the price and provides unique news and data you won’t find anywhere else.

 

Technology Has Changed America’s Taste in Beers

By John Conlin

President, Conlin Beverage Consulting, Inc.

First a disclaimer by the author.  I offer analysis, not my desires and wishes.  Only by looking at the facts can we hope to devise a successful strategy for dealing with the realities we face.

That said, is technology killing America’s beer industry?

No. But it’s changed America’s taste in beers, probably forever. The big losers? The mega-brands that have dominated the industry for more than a generation.  It’s not that the consumer no longer desires the likes of Bud Light, Coors Light, Budweiser, and Miller Lite, the top four brands in the country, but rather that the consumer for which these products were developed is rapidly transforming.

It wasn’t that long ago that one of every four beers consumed in this country was a Budweiser.  Even today, one of every five beers is a Bud Light. These mega-brands and their mass produced and mass marketed appeal ruled the beer world.  Similar mega-brands ruled most consumer products, killing off their smaller regional and local competitors over the past few decades.  But many of these mega-brands are seeing falling sales as consumers race to other brands and products. 

Are we seeing the end of the mega-brand?  Yes and the culprit is technology.  Technology is remaking of the very essence of the American consumer.  The impact of this technology skews toward youth but it is impacting all of us, regardless of age.

Technology has brought choice and personal customization to almost every area of our lives.

It is remaking of the very essence of the American consumer.  That in turn has changed what we buy and how we buy it.

Look at TV entertainment. First came the change from three networks to hundreds of channels. And now the Internet has transformed the entire concept of visual entertainment. Today, we can pick the time and source of what we’ll watch -- and the device we’ll use to watch it.

There are very few “mega-brand” TV entertainment shows any longer. As a result, viewers are watching very different things.

And how about the ubiquitous smart phone?  Here is a product which has already become the most important item in many people’s lives.  It is the primary means that they use to interact with the world around them.  And it allows almost complete personalization.  Almost every aspect of it can be changed to fit the user’s desires.  And it can easily be changed tomorrow and the next day and the next.  You can listen to the music you want when you want.  You can watch video entertainment of your choice and time.  Smart phones offer immediacy. The explosion of apps offers people ways to use these powerful computers in their personal and professional lives that was unimaginable only a few years ago.  The iPhone was introduced only 6 years ago! 

Which brings me to my observation; to believe that this consumer, and all who follow, will be drawn to some mass-produced, mass-marketed mega-brand is beyond wishful thinking.  The foundation of a mega-brand is built on a consumer who is becoming rarer each and every day.  From a manufacturer’s perspective, the problem isn’t with the product.  The problem is that the consumer for who the product is designed is becoming more and more scarce.

Not only is this technology changing the expectations and desires of the average consumer, it is also allowing these desires to be met.  Advances in technology and manufacturing now allow small players to produce world-class product, for relatively small investments.  This is true for manufacturing, packaging, labeling… the whole nine yards.  And although there still might be some economy of scale advantages for the mega-manufacturer, and these have historically been quite large, these advantages are shrinking all the time.  And all evidence is that this will only continue.  In addition, in a world where customer choice and personalization is king, being smaller, nimbler, and local is an advantage, not a weakness.  The huge plant built on the concept of very large production runs might be turning into an albatross, not a competitive advantage.

The Internet ties directly into both changes allowing a free flow of information and opinion from both consumers and manufactures.  Put all these together and you have a contradiction.  The present consumer mega-brands and their manufacturing infrastructure simply aren’t built for the world in which they find themselves.  And nothing they can do will change this reality.

In the beer industry, we see it with the explosion of craft brewers and the share declines of the mega-brands.  Of the top 4 brands; Bud Light, Coors Light, Budweiser, and Miller Lite, only Coors Light is eking out a volume increase.

On the other hand, the Brewers Association reports that as of June 2013 there were 2,538 breweries in the United States, more than at any time in our history. Over 400 came on-line in 2012 alone. More are coming.

This craft industry was up 15 percent by volume and 17 percent by retail sales dollars in 2012; this in an industry which was up around 1% in volume in 2012.  And the move to these smaller, more personalized brands is accelerating.

Some mistakenly believe this softness in the mega-brands and the incredible craft beer renaissance is due to changing consumer tastes and that light lagers are dying.  Or that they are finally paying the price for years of sexist advertising.  Or their creative material is lacking.  Or pricing is too aggressive.  Or the foreign ownership of the big two brewers, Anheuser Busch InBev and MillerCoors.  These and many other reasons are being tossed about in an attempt to explain the present situation in the world of beer.

Although there might be some truth to each, the underlying reason is far deeper.  The power of technology has profoundly changed our expectations of the brands we consume.  The one-size-fits-all mega-brand is simply not in sync with this transformed consumer.  This is true in almost every consumer products arena.

Craft distilling is exploding. Artisanal products are taking off. Natural and organic products, almost always from smaller manufacturers are taking share from their larger, national competitors; and these new kids on the block are doing this all with almost no advertising or marketing.

The country is headed back to a time when small local and regional manufacturers command the consumer’s affections. These consumers desire choice and are drawn to authentic, unique, and local products and brands, not mass produced products with ubiquitous national advertising.

This will hit large national/international manufacturers hard with share losses coming primarily from the big national brands that have dominated the market for the past few decades. Ironically, it’s their size and dominance that make them vulnerable.

In the beer world, expect to see continued declines in the mega-brands as they fight what is most likely a long-term losing war. Gimmicks with packaging and less (or more) sexist ads won’t change this reality. The consumers these mega-brands were developed for are quickly changing to become adverse to their value proposition.

Technology that has enabled small manufacturers to succeed in the marketplace has transformed many industries in a very short period of time. And that includes the beer industry.

Will the Big 4 beer mega-brands die overnight? Not likely. But their future is one of tough times. Consumers have changed and are never going back. More and more they expect and demand the ability to personalize all the important brands and products in their lives -- including beer.

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John Conlin, President of Conlin Beverage Consulting, Inc. has been providing operational, financial, and merger and acquisition consulting services to the beer and beverage distribution industries since 1986.  Conlin is an expert in the operational and financial aspects of mergers and acquisitions, organizational improvement, and driving corporate change.       

Are you a panda or a cockroach?

Robustness.  A measure of a system’s ability to deal with changing inputs while still functioning at a high level.  A robust system continues to function even though inputs change.  A less robust system’s performance is negatively impacted by input changes.

These systems could be anything… software code… a mission to Mars… a company or organization… your family car… even a living organism.

The old Windows operating system was a great example of a piece of software with a low robustness factor.  If a person hit the “wrong” key, you’d confuse the software, get a blue screen and have to re-start the computer.  A robust piece of software would continue to function even though the user made many wrong entries.

If one were designing a flight to Mars, one would want it to be very robust.  Stuff happens and you’d need the systems to continue to function within a wide range of inputs.  No pulling off to the side of the road if you have any problems on this trip.

You family car has become more and more robust through the use of technology.  Ideally it continues to function even in extreme situations (changing the inputs) like full braking or ice-covered roads or evasive, accident-avoidance.

And this type of analysis also works for living systems, i.e. animals.  For this example I take two extremes… our friends the panda and the cockroach.

We’ve all probably heard stories about that tough SOB, the cockroach.  Survive a nuclear war.  Survive dang near anything, anywhere.  THAT is one robust system.  Inputs might change.  Individuals might be wiped out.  But there will be enough survivors to keep the cockroach roaming the planet.  A single female American cockroach will produce around 150 young in her 1,000 day life time… Do the math.  That can add up to A LOT of cockroaches in a very short period of time.  They are omnivorous scavengers who will eat almost anything.  They can go for as long as 6 weeks without food… they are fast, sprinting as fast as 80 centimeters per second (that’s over 31 inches per second) and can turn on a dime at full speed… and yes, the can live without their heads for weeks.  Talk about robust!

On the other end of the spectrum there is our warm and cuddly friend, the panda.  The panda is a very specialized animal.  It basically eats only one thing… 99% of its diet is bamboo.  Which is unfortunate from a robustness-viewpoint.  An omnivorous scavenger who will eat almost anything is WAY more robust than an animal which eats only one thing.

Even worse, bamboo has almost no nutritional value.  Therefore the panda must spend 10 – 16 hours PER DAY foraging for food and eating 20 – 40 pounds PER DAY to keep alive.  And even then the panda has a very low energy level.  It becomes exhausted after only minor exertion.  The female ovulates once per year and can become pregnant for only a period of 2 – 3 days.  Many don’t even have the energy or desire to breed.  From an evolutionary viewpoint this is a useful adaptation since you couldn’t have a lot of pandas wandering around… they’d eat all the bamboo and they all would die.  But from a long-term survivability viewpoint, this all adds up to a very low robustness and thus, an endangered species.  Human activity hasn’t helped them but they are in reality a very specialized animal which is most likely, long-term a temporary visitor on this planet.

Which brings us back to you and your organizations and the title question… are you a panda or a cockroach?  How robust is your organization?  I don’t know about you, but I’d sure rather build a cockroach organization than a panda organization.

From a supplier/risk viewpoint, the MillerCoors distributor is more robust than their ABI counterpart.  Since the typical MillerCoors distributor has their volume spread over more suppliers, they are less vulnerable to “changes in inputs”, i.e. specific brand declines, than their ABI brothers and sisters.

Many ABI distributors are attempting to become more robust through the addition of new suppliers.  Most likely a wise path to walk but in the short- to medium-term, ABI distributors will be VERY reliant on one very significant input.  That’s just the way it is.

But what about other changes in inputs.  How does your company stack up on the robustness scale?  Look at your personnel.  If ol’ Joe gets clipped on the highway some morning does your company continue operating at 100%?  If your ordering person wins the PowerBall and walks out with no notice, do you not skip a beat?

If anything happens to ANY of your folks does the system keep operating at a high level or does it have problems?  Are you a panda or a cockroach?

In your next management meeting spend a little time looking at every aspect of your business… people, technology, energy, equipment, brand/supplier strategy, disaster planning, vision and mission, etc. and ask how we can become more cockroach and less panda.

If tough times come the cockroach will still be around ready to take advantage of all the opportunities change presents.  The panda can barely get by in good times, in tough times it is probably toast.

So ask yourself, are you a panda or a cockroach?

 

 

 

 

The Coming Artisanal/Craft Era

Paradigm shift - a radical change in underlying beliefs or theory.  Some times in history it is evident that one is living in an on-going paradigm shift.  The French and American revolutions might be examples.

But I believe most of the time we are unaware of the incremental small changes that are occurring around us.  If you could step out of the here-and-now and look down on what is happening it might be quite evident… but since we live in the here-and-now we often don’t see the paradigm shifts until they have already happened.  It is always easier to view the past than the present.  Then one can look back and see how “obvious” these changes were.

With that intro, I believe we are in the midst of a profound paradigm shift that will rock most consumer product companies to their core.  Over the recent few decades this country has seen the growth of large consumer product companies with their associated strong national/mega-brands.  The smaller local and regional players were hit pretty hard during this time… in fact most have been squashed as this national/mega-brand reality simply rolled over them.

But that tide has already turned.  I believe we are in the midst of an explosion of artisan or craft consumer products that will only accelerate over the coming decades.  One sees it in this industry with the explosion of craft brewers.  The Brewers Association reports that as of June 2013 there were 2,538 breweries in the US… more than at any time in the country’s history.  And hundreds more are coming on-line.

Although it hasn’t receive as much attention, the craft/artisanal distilling industry is following the same path as craft brewers… although at an even faster pace. 

The local paper in Denver had a recent story on an artisanal cheese manufacturer.  This paradigm shift is not localized to any one industry or region.  It is the tip-of-the-spear and it is moving like lightning.  And I believe it will sooner or later impact nearly every consumer products company and every mega-brand in the entire country.

At its core, this is what is driving the present downward trends for all the beer mega-brands… that compounded by being used as a Cash Cow… which is being milked like a milkmaid mainlining Red Bull ;-)

The high-water marks for the beer mega-brands might have already been reached and they might face a long-term prospect of continued decline.  It might not be so much that the consumer doesn’t desire a light lager… just that they don’t want THOSE light lagers.  For any craft folks reading this, I believe this just might be an opportunity for you… there are only so many IPAs the world needs ;-)

There are many things driving this profound paradigm shift…

Technology and manufacturing – Since we live in the here-and-now we often don’t really understand how far and how fast things have changed on this front.  Small players can product world-class product… for relatively small investments.  This is true for manufacturing, packaging, labeling… the whole nine yards.  And although there still might be some economy of scale advantages for the mega-manufacturer (and these have historically been quite large), these advantages are shrinking all the time.  And all evidence is that this will only continue.  In addition, in a world where customer choice is king, being smaller and nimbler is an advantage, not a weakness.  The huge plant employing hundreds and hundreds might be turning into an albatross, not a competitive advantage.

People power – In addition, as the large consumer products companies have flattened their organizational charts and technology has replace thousands of positions, there is much less upward mobility for their employees.  Life-time employment is a thing of the past.  So there are people with tremendous knowledge and skill sets who are available.

Hard economic times – Perhaps counter-intuitively, tough times cause an explosion in entrepreneurial activities.  The risk/reward decisions become easier when you don’t have many other options… trust me, I’ve got some been there, done that on this topic ;-)

Intangibles – People are social animals… we long to belong to a team.  Few of us strive to be some anonymous schlep at some large, face-less, soul-less corporation.  These smaller companies offer a great deal of personal fulfillment… sure everyone would like to hit the long ball and get rich but getting up every day and loving what you do is worth a lot more than $$.  Talk to almost any employee at a craft brewer.  In addition, in a smaller organization you can actually see the results of your efforts.  If you work for a huge multinational company your efforts simply disappear into the ether whether you bust your butt or surf the web all day.  This is not true in a smaller company.

The changing consumer – let’s use the ubiquitous smart phone as an example.  Here is a product which has already become the most important item in many people’s lives.  It is the primary means that they use to interact with the world around them.  And it allows almost complete personalization… almost every aspect of it can be changed to fit the user’s desires.  And it can easily be changed tomorrow and the next day and the next.  Ring tones can be personalized to whatever you want… ring tones can tell you exactly who is calling.  You can listen to the music you want when you want.  You can watch video entertainment of your choice and time… the concept of TV is being transformed as we speak.  It offers immediacy… these folks don’t email (that’s soooo 2000).  They don’t leave voice messages… why take the time?  They text which is about as immediate as one can get… hit send and it’s at the other’s phone in a matter of seconds.  To believe that this consumer, and all who follow, will be drawn to some mass-produced, mass-marketed mega-brand is beyond wishful thinking.    

Combine all these factors and one can get a fleeting glimpse of the profound consumer products paradigm shift that is occurring under our feet.

Will the beer mega-brands go the way of the dodo?  Not anytime soon. There still are A LOT of bottles and pints of these brands being consumed.  Brand Budweiser has been declining for years and it is still the number three beer brand in the country.

Will they see continued volume and share growth?  I’d bet against it.  I think the future is in the other direction.  And it might come faster than any of us can imagine. 

Historically one often speaks of eras… no question the last few decades have been the era of the mega-brand.  Perhaps that era is coming to a close?

Beer, spirits, cheese, you name it… the small artisanal explosion is already happening.  Where it goes is anyone’s guess, but it will leave its scars on more than a few large consumer products companies and their associated mega-brands.  And perhaps on their distributors too.

 

Is the US beer market being milked?

The US beer industry continues to have a tough time.  The Beer Institute reports total shipments down 2.3% in the five months thru May.  Longer term, spirits continues their march, taking share.

The high-end continues to rock but the rest is pretty poor.  The usual suspects are blamed… weather and weather… taxes and the economy… and those dastardly spirits folks. 

Could the US beer industries woes be the logical result of the market realities of its larger players?  Could the woes be as simple as the result of over-aggressive pricing and to a lesser degree a change in the nature of the product consumed?  For the bang-for-the-buck crowd, a case of beer will never match a 1.5 liter of booze.  In my favorite local liquor store I can get a 1.5 liter of Sapphire gin or Kettle One vodka on deal for $32.  Note these are super-premium products; there is A LOT of much cheaper, quality stuff out there too.  As of 7/29, a significant liquor store in Littleton has a front line price on 24 12oz cans of Coors/Bud/Miller at $27 and change.  With taxes that will be over $30 for a case of cans.  Oh... and we are covered by two branches ;-)

For the bang-for-the-buck crowd, a mainstream light beer will never match the punch of a craft beer… to say nothing of a taste profile which younger (most?) drinkers are flocking to.  A few craft beers are already priced at parity with Coors/Miller/Bud bottles. 

And the very nature of craft beers will lower overall volumes.  If every drinker in the country switched to craft beers, overall volumes would plummet to a new much lower baseline.

And tough economic times drive many to think in more bang-for-the-buck ways than they might in better times.  If you want to feel better as you whistle past the graveyard you can read how the price of beer is actually quite low based on this or that metric but you know what?  Whether these are valid or not is completely irrelevant.  It is the consumer who determines these things, not some inflation-adjusted formula or some explanation based on the increased cost of inputs.  And the consumer is not tied to these analytics; they can change their mind and “re-set” what they consider a good price.  Is over a buck a beer for off-premise consumption a “good” price?  I think many folks are saying no.  And I think their wallets are in complete agreement.

But there is a reason for this aggressive price… back in the days when all of the major brewers were US companies (and US-focused) there was much more importance to things like a share point here or there and the never-ending battles with wine and spirits.  For the most part the US was the only stage on which they played.

But now 80% of all US beer volume is controlled by 2 large, international companies.  I don’t believe they look at US beer pricing (and its impact) in the same way these companies did in the past when they were solely US companies.  And why should they?

This is neither right nor wrong it simply is an observation.  I have written about the economic concept of Cash Cows which you can find here.  Basically Cash

Cows have high market shares in a marketplace with low growth rates – that pretty much defines the US beer market.  InBev saw A-B (rightly) as a very fat Cash Cow just waiting to be milked.

Cash Cows are typically high share leaders in a mature market or high share mature companies in major markets… they generate more cash than they consume AND typically have a lot of dough available… this pretty much defined pre-acquisition A-B.

Under classic strategy these business units should be “milked”… taking profits and investing as little cash as is possible. 

Cash cows provide the cash to drive a lot of the other actions of the company…

·         Providing cash for major business development initiatives, i.e., turning Question Marks into market leaders and helping fund Stars

·         Reorganizing regional and global financials by consolidating post-acquisition revenues, company-wide admin, R & D costs, debt service, dividends, etc.

I think the “woes” of the US beer industry are as simple as this… it is being milked, especially via pricing, to help fund these companies other activities in other countries… places where there is tremendous upside.  Again, this has no moral aspect, it is simply a business decision I believe has been made.

Unfortunately, this cash harvesting strategy and reapplying of financial resources for other programs could create a significant paradigm shift. Broad-based business expansion projects become top priority.  These can deplete resources for ongoing business development.

And by doing so it has opened the door to many of these “threats” and has been a boon for craft brewers by giving them tremendous pricing leeway.

Many beer wholesalers cry about their volumes these days but most are pretty happy with their gross profit.  I don’t see too many running for the exits.

Now of course if one takes the long view (ignoring the kumbaya sing-along on unity from the Beer Institute) will this be good for the beer industry for the long haul?  As I have noted in my attempts to share my wisdom on the craft brewing industry (which can be found here)… in reality there isn’t any such thing as the “beer industry”.

Folks who run large public companies and who think of the long-term are as rare as purple, 2-headed unicorns who speak French.  This is no negative reflection on them; it is simply the sad reality they live in.  And as a friend and fellow cynic noted when he worked at a large bank… this public company was run to enrich the top 200 employees (and I think he was very generous in this number) and to keep the stock price up.  That’s it. As a side note, I believe the Third was an exception to this but he was very old-school and he thought more as the owner of a private company since that’s basically how he ran A-B. 

So I would assume the big dogs will continue to do what they perceive is in their best self-serving interests… not necessarily in the US “beer industry’s” best interests but in the multi-national’s best interests… all while looking down the road about a quarter or two.  And unless ABI has a change of heart, or MillerCoors wants to get into a bruising fight that they cannot win, one would expect that the US domestic beer industry will continue to be treated as what it is to these companies, a Cash Cow that exists for the milking.

Of course they will fight things like equalization because that will hurt their Cow.  And of course they will come out with new products, etc… this isn’t an either/or type situation just the reflection of a larger strategic reality.  They have access to… or do they own? ;-)… incredible distribution systems.  You want that Cow to gush milk for as long as forever… or at least as long your stock options last ;-).

It remains to be seen what this paradigm shift means and how it will impact US beer distributors who do live in the long-term.  You’ll have to wait for my wisdom on that topic ;-)  Perhaps I’ll even make you pay to hear it and to devise strategies for dealing with it!  How’s that for a crazy thought?  ;-)

As a parting side note, just as I was about to post this came an article in the St. Louis Business Journal… you can find it here.  I’ll quote the first paragraph…

Anheuser-Busch InBev invests $1.4 billion in China

“In a push to create the world's first global beer brand, Anheuser-Busch InBev is making a big investment in China — a market that is expected to deliver more than 40 percent of the industry's growth over the next 10 years.”

 That Cow is goin’ be a rocking ;-)

And as another parting side note, the day after I posted the above, Harry led his 7/30 newsletter with this news...

A-B Taking Pricing

Dear Client:


A-B is taking a price increase again at the end of September in some markets.  BBD has seen price sheets going up between $0.45 - $1.20 on package beer.  Looks like it's going to be another year of 2 to 3% price increases even in soft times

Thanks to Harry... and I hear the milkman coming... again and again and again ;-)

Craft Brewers and the Prettiest Girl at the Dance-Syndrome

After reading a recent piece in Harry’s newsletter I was taken back to a significant time in my life.  Harry and I emailed back and forth about it and I thought it could perhaps be a good post.

Harry was reporting on the money and attention that is being thrown at craft brewers and their responses.  Let me tell every craft brewer out there (and every wanna-be) my tale of woe…

THE SITUATION

The time is the late 90’s.  The dot-com boom is rocking.  There was a river of money flowing by and I wanted to jump in and grab some.  The final straw was when I read about DrKoop.com in the Wall Street Journal... here was a company with revenue (not profits, but revenue) of around $40,000 and its market valuation topped out at over a billion.  And where is it today?  Exactly.

I called a tech friend and said let’s get together… as I told him, he was a tech-wizard and I know how to start businesses so let’s get rich.  We got together with a few of his tech buddies and discussed how we could all make each other rich.  And off we went with a company we named eSniff.com (notice how we tried to capitalize on every buzz-word of the time, the e and the .com).  Our technology used in tech-terms a packet sniffer and thus the name.

The company’s goal was to help organizations keep people from screwing around on the Internet at work.  It was a real product with real profit… both things few of the dot-com companies had.  We even went international right away with sales in Mexico and a beta-product for Japan.  Trying to impress the money-guys even more.

Looking back, our arrogance and my ego were astounding… are you listening yet craft brewers?  Little did we know we were looking in the rear-view mirror when we pounded our chests about the value of our business and what we would or wouldn’t take for even a piece of it.  We thought since this or that company was valued in the billions we could match them.  But since we were doing our planning by looking in the rear-view mirror, we failed to see what was coming… instead we focused on what had been… and the past was very much to our liking. 

Our business strategy was to get big fast… that’s what got the private equity guys attention… so we burned through money and did in fact get relatively big.  We actually had the beginnings of a pretty nice little company… eh, craft brewers?

Now the private equity folks aren’t stupid and they knew many of these business plans and the valuations they were generating were in many cases built out of smoke and mirrors.  There really wasn’t much there, there.  But operating on the greater fool principle… you know the greater fool principle?… the specific investment might not make any sense and have any real value but as long as you can find a greater fool to sell it to at a profit, what difference does it make?

During the housing boom in Florida I heard of many situations where people bought a house and sold it in 90 days for a $30K profit.  It’s all well and good as long as there is a never-ending supply of greater fools.  But just like the kid’s game Musical Chairs, it’s not much fun when the music stops and there is no chair for you.  Being the last fool really sucks.

So these private equity folks were all VERY aware that a great deal of the dot-com stampede was driven by greater fools… but they played because they could make HUGE profits… and did.  And they had the inside information so they thought they could ensure there would be an exit for them once the music stopped.

So we lived it… a river of money and crazy valuations simple stopped.  It did not slow down… it did not coast to an easy stop… it ENDED.  The private equity folks behaved like a herd and when one smelled danger they all took their money and ran to the exits.   Dreams of going public?  Yeah right.  Dreams of a big dollar payday?  Yeah right.

And for those of us whose business plans depended on this river of money to fund our growth?  Well we went from the prettiest girl at that dance to a person begging to do things just for a few bucks to keep us alive for another day.   Not only were we willing to sell our soul, we did.  When you are staring into the maw of bankruptcy and the damage to every employee it will impact, it is amazing the things you will willingly do.

THE CASE FOR EXPERIENCIAL LEARNING

Every craft brewer out there needs to read that last paragraph again.  Getting your nuts cut off has a very negative impact on your aforementioned arrogance.  I went from laughing about the “low” valuations that we would never accept to sleepless nights wondering how we could all just get out with our hides in one piece.  Our original investors lost everything… and they were friends who had trusted me.  I still can’t get over my failures to these folks.

So craft brewers… enjoy the ride.  But the path from prettiest girl at the dance to the depths of depression and despair is a lot shorter than you might think.  And if you think you remotely control this (we’d NEVER let that happen to us), you are whistling past the graveyard.  I’ve had the misfortune of walking this path… you are riding a wave but don’t let your arrogance and ego convince you that you are the maker, let alone the controller of that wave. 

Being in the sweet spot of an incredible consumer awaking is a great place to be.  Just make certain your strategy is flexible enough to deal with all potentialities.  I don’t know the future, but things are just like they have always been right up until the moment they aren’t anymore.

And remember, if and when the money folks get a sniff of fear, the game will be over and it will be over quickly.  No more come-hither looks from across the room.  No more business cards with special messages.  No more of a lot of things.  Only the bottom-feeders will be happy when this comes to be… and you very well might be their meal… that is if they even consider you worth eating.  Right now the value of your brand equity is high (oh, I remember those days) but after the crash you may find it is non-existent… been there, done that.

And yes, Steve Cook and I are providing M&A and profit-improvement services to craft brewers and would be happy to discuss potential opportunities but please don’t write off my tale of woe as just some self-serving marketing ploy.   This story and my scars are very real.

Whether you use our services or not, keep the above in mind as you enjoy being the prettiest girl at the dance.  Just don’t think that it will last forever.  I lived it and hope you can learn from my very real pain.  From the peak to the valley is a lot shorter (and a lot quicker) than you can imagine.  And it’s kind of like sky-diving… it’s not the fall that is the problem… it’s that sudden stop at the end  ;-)

Random Thoughts on Craft Brewing

Craft beer… the prettiest girl at the dance.  Harry, Benj, Modern Brewery Age, Beverage World, Beverage Industry and everyone else and his dog have written extensively about where it is and where it is going.  As usual, let me help clarify why. ;-)

First we need to understand that words are abstractions, they don’t necessarily exist in the real world.  Thus the craft beer industry doesn’t really exist.  Craft brewers yes… an “industry” not so much.  So all this concern about where the industry is going is somewhat off the mark.

Each and every one of these craft brewers will do what they perceive is in their self-interest.  That’s exactly what they should do.  So for example when folks are wringing their hands over the explosion of craft brewing capacity they are talking about something over which no one has any control.

As a mental exercise, let’s take a stroll and see what the Tragedy of the Commons can teach us.  Haven’t heard of that phrase before?  It comes from an article titled "The Tragedy of the Commons" by ecologist Garrett Hardin. 

Hardin used an example involving medieval land use in Europe.  The Commons was a “public” area where herder’s could graze their livestock.  Since it was “owned” by all, no individual or group existed to look out for the best interests of the Commons.  Thus it was in each herder's individual interest to let as many of their livestock as possible graze there.

Of course this will ensure the Commons is sooner or later overgrazed and damaged for all.  But for the individual herders, for at least a while they receive all of the benefits from the additional livestock grazing, while the damage to the Commons is shared by the entire group.  If all herders make this individually rational economic decision, the Commons will be depleted or even destroyed, to the detriment of all.

Now the craft beer business is not a limited resource like the Commons but the realities they face are similar in many ways.  One can look at the landscape of craft brewers and see a very likely train-wreck regarding over-capacity.  But who is going to pull back their expansion plans for the good of the “industry”?  I can answer that… no one.

Much has been written about the issue of old craft beer and the damage it might do to the “industry”.  Guess what, folks have discovered the wonders of pipe-line fill.  It can make a business look incredibly successful (for at least a while), whether this is reality or not.  All those warehouses and all that retail space adds up to quite a bit of beer… this is something the big boys discovered long ago.  And if the beer gets old?... perhaps that’s not a worry of an individual craft brewer.  And the damage it does to the “industry”… what “industry” is that? ;-)

KNOW WHO YOU ARE

Long ago in my MBA finance class we had a case study on a quickly expanding grocery/mass merchandise chain, a hypermarket.   The case study was to analyze the financial-driven growth of this company… and the solution/discovery was that their growth was the only thing funding their operations… and once the growth slowed or ended, the company was not financially sustainable and would fail.   Obviously rapid growth sooner or later hits a wall and down the company fell.

So my prediction on the craft capacity front is that a number of things will most likely happen to individual craft brewers…

·         Some will hit the wall at high speed and meet an unfortunate end....fail to plan then plan to fail.

·         Some will hit the wall at slow speed and will survive the experience if they get some well needed strategic and tactical help.

·         Some will power through the whole episode and come out stronger and more profitable – these will be considered the smartest guys in the room – but remember as I’ve noted before, nothing wrong with a little luck to go along with their skill.  However, if you can only have one, give me luck any day!

·         Some might be able to cash out before the wall and possibly laugh all the way to the bank if they have value and brand equity.

And of course too many trade publication view things from a static perspective, but the tsunami is inevitable.  Keeping up with change and paradigms shifts are critical… so the entire issue of what is a craft brewer is an ever changing one.  Consumers don’t care if this or that company fits into this or that category.  That’s not the way they think – and why should they?

Most importantly, one has to contend with a wide range of strategic and tactical options. Perhaps Company A wants to some day become the biggest brewer in the land. Perhaps Company B wants to ramp up as quickly as is possible (can you say fill that pipe-line) and get out while the getting’s good.  Either choice is acceptable (as are hundreds in between) but your success is more likely when you know the exact path you hope to travel.  Not that there won’t be surprises and adjustments as you walk that path, you just have to have the knowledge and flexibility to deal these too.

All you craft brewers out there… need some business development support?  We can link where you want to go with how you will get there!  Steve and I are now working with craft brewers to explore their options based on their unique situations.  Give us a call and let’s talk about diving a little deeper.

ABOUT RETAILING

Perhaps one perceives themselves as a brewer, not a retailer.  The next sees the craft beer-thing simply as the draw to fill their on-premise establishment (kind of like the strippers at a “gentleman’s club”).  Note this doesn’t imply the retail-vision will produce lower quality craft beers, just that their strategic vision is different than those with a desire to be a brewer first and foremost. 

And it can be quite a retail draw.  A retail-focused craft brewer just opened up in my neck-of-the-woods and their business is incredible.  They are only open limited days and times… but every time they are open, they seem to be packed.  Anyone in this business knows that you can make a heck of a lot of money in a short period of time with a hot on-premise establishment. 

In fact in many places in the country a push-back is starting from regular on-premise accounts from what they consider the unfair advantage the craft brewers enjoy via their tap rooms.  The craft brewers (being the prettiest girl at the dance) often get special treatment for their tap rooms… most to their advantage.  And of course since they make everything they sell, their retail profitability is dang high!

How long will it last?  How high will it go?  Heck if I know.  But there is no indication it is slowing nor do I think things will ever go back to “normal”.  This is a permanent change in the landscape.  Lots of moving pieces and I’d guess there will be surprising winners and losers.

Some pricing changes are already occurring… in several places in the country major craft brewers are priced at parity with Bud/MC 6 pack bottles.  Perhaps those $12 four-packs are going to find some pricing pressure?  And of course volumes remain soft for the big boys (and quite a few others)… everyone is asking themselves if this will be the summer when serious price competition fires up. 

What’s going to happen to those high prices and sweet margins the craft brewers (and their distributors) presently enjoy?  From a distributor perspective, in MANY situations, those craft beer gross profit dollars are what is keeping you healthy.  You might want to take an objective look at your business exposure.  Our valuation services do just that and much more.

Just some things to think about as we go about our Commons and our everyday business.

Coca-Cola rethinking their US distribution plan

There was an interesting article in the 4/17/13 edition of the Wall Street Journal.  If you subscribe, you can find the article here.  The headline was “New Coke: Bottlers Are Back

 Basically the article was about Coca-Cola’s recent change in direction where it is now gradually getting out of the distribution business, again.  Some quotes from the article explain this: (underlining and highlights are mine)

 “Coca-Cola Co. likes to have its cake and eat it too.

 That is why it sold its bottlers and then bought them back again. That is why it is now going back to the franchise model for distribution.

 In a deal that would allow it to keep vast amounts of control over its business, Coke said it reached an agreement in principle to expand territorial distribution rights to five independent bottling partners. That would reduce Coke's direct control over its U.S. distribution only to about 75% from 80% currently. The company said more such deals are on the way as it backs out of the delivery business.   

 "You need to walk before you run,'' said Muhtar Kent, Coke's chief executive, in an interview, of the step-by-step approach.

 In 2010, Coca-Cola Co. paid $12.3 billion to buy its biggest U.S. bottler in order to secure control of most production and distribution in its home market. Now, this latest approach will allow it to keep production of popular brands including Sprite, Powerade, Minute Maid and Coke in-house but gradually parcel out distribution once again.

 The move is a delicate balancing act by Coke, which is trying to keep a tight grip on how its drinks are made and sold while shedding the capital-intensive business of maintaining delivery trucks, routes and warehouses. Coke also is seeking to boost sagging profit margins in the U.S., where soda consumption has fallen eight straight years.

 Coke's share price surged 5.7% Tuesday to close at $42.37 on the New York Stock Exchange as Wall Street applauded the model even as the company reported a decline in first-quarter profit and revenue.

 The Atlanta-based company's move could prompt PepsiCo Inc., PEP +4.13% its main beverage rival, to speed up its own review of its operations. PepsiCo paid $7.8 billion in 2010 to acquire two large independent bottlers, also giving it direct control of most of its U.S. beverage manufacturing and distribution.

 Coke currently has about 70 small bottling partners manufacturing and delivering about 20% of its drinks in the U.S. Tuesday's announced deal would increase the scale of five of them…

 But unlike past distribution deals, some of which stretch back generations, Coke isn't giving the bottlers perpetual rights to the new territories. Instead, bottlers would be given 10-year licenses for any new real estate, which then need to be renewed. The initial deals with the five bottlers aren't expected to close until 2014.

 Mr. Kent said a lot has changed since Coke began striking U.S. distribution deals for its famous cola roughly a century ago. At the time, territories were determined by how far horse-driven carriages could travel in a single day. The new distribution deals are "moving us into the 21st century,'' he added.

 Selling off distribution rights could earn Coke a lot of cash. Consumer Edge Research estimates that the 80% share of U.S. distribution rights currently owned outright by Coke to be worth around $9.5 billion.

 Coke isn't ready to surrender control over manufacturing, though, planning instead to further integrate bottling operations around the country. Manufacturing of Coke products currently is spread over hundreds of facilities.

 Mr. Swartzberg said he wouldn't be surprised if Coke eventually also sells majority stakes in the manufacturing part of the business a few years down the road.”

 My first reaction is to notice that same old big business trend… new management has to do “new” things.  Team X comes in and decides outsourcing is the key… after they leave Team Y comes in and decides insourcing is obviously the right call.  Can’t just stand there, you’ve got to do something!

But this change is pretty big news.  Coke has found (and it seems Pepsi might be following) that the distribution end of their business is better done by others.  I completely understand their desire to control the production (it is after all THEIR product) but they have found the “capital-intensive business of maintaining delivery trucks, routes, and distribution” is perhaps not their strongest suit.

Soft drinks are like beer, they require a lot of feet on the street and a smaller, more local private company driving this effort seems to be a superior choice.  I hope some of those craft brewers think about this… are they craft brewers or are they distribution companies who happen to brew beer?  Strategically these are WAY different beasts.  Et tu Brito?

In fact in other parts of the world, Coke has already divested itself of both distribution AND manufacturing… they let other specialists take care of that.  They want to retain control and make money.  Pretty simple.

Also interesting that these franchises aren’t perpetual but rather with a fixed time frame.  Coke wants to ensure IT ultimately controls them, regardless of who actually owns the thing.  Again, I understand their desires.  Might we see something like this taking hold in the beer business?  I’d be surprised if we didn’t.

Of course there are many differences between soft drinks and beer but as many organizations have found, specialization often leads to better performance.  Let the local guys deal with the warehousing, delivery, and merchandising needs (by definition these are local activities, they must be) while the big dogs focus on getting a great product produced and marketed.  Then pass the ball to the local guy and let them take it to the street.

Sure makes sense to me… and obviously to Coke and Pepsi too.

UPDATING YOUR VALUATION PROPOSITION

By Stephen Cook, CMC

Great Lakes Consulting Associates, LLC

www.BeverageGuru.com

The nature of consumer goods and the dynamics of the supply-chain continue to tax our abilities to effectively manage and concisely communicate. For the beverage industry consultant, using numerics to identify opportunities by developing illustrations is a must have for our “chief” kit. How better way to get your point across then by “painting with numbers.” Don’t believe it? Consider this.

A long time ago while at home in NYC, I was watching John Gnagy, America’s pioneering television art instructor.  I remember thinking how creative and impactful Gnagy’s visualization process and comments were. His audio-visual process was incredibly effective in translating his vision into a reality that was easily understood by viewers. Just how good was it? He was chosen as the first performer, on the first show on the day the TV broadcast antenna was completed atop the Empire State Building in NYC.  This self-taught “blacksmith” of art went on to become one of the country’s greatest audio-visual educators by teaching drawing art, yes drawing and art, to millions of viewers. Gnagy’s success focused on breaking down the drawing process into fundamental elements and developing a quick, easy and proven method to learn through visualization and communication.

Our valuation methods and process are very similar to Gnagy’s approach. The process addresses the fundamentals, namely, the business components that drive cash flow and the overall value of the enterprise. We keep it simple yet effective and compare our clients operating financials to a pro-forma template that is organized, easily understood and presents a clear of picture of the business. Just like Gnagy our “painting with numbers” methods are proven and provide high value by visually translating and clearly communicating the current and longer-term financial realities of your business based on size, region, product mix and financial performance.

As the pressures of consolidation continue to diminish (estimate over 80% domestic volume consolidated), we are finding more clients interested in a less formal valuation process and an updated financial review. Our high value-added strategic planning approach to company valuation aligns well with the ever-changing market needs for many of our wholesaler clients by identifying areas of financial strength and weakness; providing a clear picture of what the business looks like; and ensures our clients are focusing on the right priorities and business drivers which convert into increased value of the enterprise.

A valuation process of this nature is about more than just providing “a number”. It is about enhancing your planning process by providing expert insights into sales and operational areas of improvement throughout the company. Deliverables include financial-based analyses of your entire company AND an industry performance comparison AND projections of sales revenues and operating expenses based on current activities and trends.  This is a battle-tested executive management tool which could be a vital part of your strategic planning session.  

The Proposition, from both a strategic and tactical standpoint to wholesalers:

Can you afford NOT having an updated valuation profiling of the enterprise and NOT use the results in your planning process? KNOWING MORE, ABOUT YOUR COMPANY, THAN POTENTIAL BUYERS, SUPPLIERS, COMPETITORS OR CUSTOMERS IS JUST GOOD BUSINESS PRACTICE!

Give us a call if you would like to discuss further. Looking forward to everyone having a great and prosperous year.

 

 

Operational Realities of the Explosion of Brands and Packages

Had quite a few responses to the last post on brand and line-extensions.   So I thought I’d talk a little more about this explosion of brands and the operational realities this creates. The constant evolution of the beverage scene will continue to put stress on strategic planning and proper resource allocation.  There is no room for complacency.  The game is from here on out.

AN ENVIRONMENT OF CONSTANT CHANGE

I admit I’m getting old but I well remember driver-sell days.  Can you imagine trying to sell today’s product line via driver-sell?!  I would pity the poor driver who had to try to come up with that day’s load.  Yikes indeed.

We live in a world with an explosion of suppliers and brands and packages.   

  • Suppliers come and go (expect this to pick up pace as a normal process of shake-out sooner or later occurs in the craft world).
  • Brands come and go.  And not just from smaller folks. 
  • Being the “Bud guy” no longer insulates you from these market-driven realities.
  • Seasonals – everybody’s favorite ;-) make things even more interesting. 
  • Packages come and go and come back again. 
  • Lastly, the battle for space is never ending, and I have yet to find a box-stretcher that can magically accommodate everyone’s desires.
  • Bottom-line… performance from every area of an organization is becoming increasingly important and increasingly more difficult.

As some of my responses noted, this is simply the new normal so you might as well get over it and get out there and sell.  Never forget the advice from that old guy (104 years old) “Was ain’t is”. 

THE NEED FOR ORGANIZATIONAL FLEXIBILITY & PLANNING

Many companies have responded to these changes by adding a few of these over here… and modifying some of those over there.  Over time, these individual responses to a rapidly changing market often become inefficient and less effective than desired.

Why?  Well, remember your company is an integrated complex system.  It is a living, breathing organism whose performance is directly affected by the relationship and ability of the parts to communicate and work to a common goal.  It is not the sum of a bunch of different parts.  The better all aspects of the system work together, the better the system will perform.  Having parts which are not in harmony is not only inefficient; it can be very frustrating too.  Think of an engine whose timing if off, the system will not perform well no matter how hard one tries.  And it will most likely take even more effort (and $$) to obtain this sub-par performance.  A Lose-Lose situation.

These market-based organizational modifications are well and good if part of a larger strategic and tactical planning process.  Otherwise it can cause a lot of organizational stress.  Occasionally, one needs to step back from this and with the management team look at the company completely anew… the roads are where the roads are.  The bridges are where the bridges are.  The retailers are where the retailers are.  Other than that, everything can be changed.

The answers to these questions should drive the planning process: Who are you?   Who do you want to be?  What market realities do you confront?  What are your organizational strengths and weaknesses?  What threats and opportunities present themselves?  What are your options?  Where is the company going?  Is that where you want to go?  How will you get there? 

A HIGH RETURN ON YOUR INVESTMENT

Now I’m biased in this but I firmly believe my or Steve’s presence in this process greatly helps ensure a better, more effective and efficient solution.  You and your management team know each other very well.   Sometimes that’s good but sometimes it is a hindrance to creativity.  You all are well aware of the other’s thoughts, biases, and BS.  Often important issues aren’t even discussed since everyone already knows everyone else’s opinion.  Necessary and vital discussions don’t occur since they lead to the same dead-end… why go there for an unproductive exercise in frustration? 

Perhaps you need someone with new BS ;-)  That’s me.

Although you and your management team are the experts in your specific marketplace (and if you aren’t there is little I can do to help you), Steve or I perform a critical leadership role in the strategic planning process while providing the organizational design expertise (based on hundreds of wholesaler and supplier engagements) to meet your ever-changing needs.  Together we create a better, stronger team.  I’m the agitator who changes the dynamics of this mental process.  And when we’re done, I leave as does my cost.

I firmly believe there is tremendous value (and team building) in the planning process.  Most management teams learn to love me right away.  I’m about identifying problems and SOLVING them.  In addition, I generally can give the boss more grief than they can comfortably do ;-)  

My attitude is you are paying me for my advice and insights; therefore I am obligated to provide them.  This type of true unbounded communication rarely occurs without the presence of an outside agent of change.

As an additional benefit, I help owners better understand their team and I help managers become better at the art of management.  This last point is not a minor one.  Your managers and supervisors are the tactical players who guide the battle… the better they are at managing, the better your performance on the street and on the income statement.

Not to brag ;-) but your entire organization will be better because of this process.

The best time to do things is the present. Take good and make it better.  Take great and drive it to a higher level.  But don’t wait for pain to force this mindset.  Instead embrace it as a positive and rewarding constant. Let us work with you, your management and staff to design and implement a continuous improvement process.

Take a week or two and re-imagine your company with our assistance.  You won’t regret it… but then again, I’m biased. ;-)

Give me a call or email if you would like to discuss this opportunity.